Looking for Change

Spent DocumentaryDocumentary: Spent: Looking for Change (2013). Sponsored by American Express and narrated by Tyler Perry, this short (39 minutes) documentary is a film about everyday Americans shut out of the finance system most of us take for granted.

Many of these Americans turn to pawn shops, check cashing services; and use payday and title loans to meet basic financial needs. Of course the practice is quite costly. It has been calculated that $89 billion a year goes to fees and interest for using these types of alternative financial services.

According to the Pew Charitable Trusts’ Safe Small-Dollar Loans Research Project, an estimated 12 million Americans take out payday loans each year. On average, these borrowers take out eight loans per year, averaging $375 each. The fees over the course of a typical two-week loan? They averaged $15 per $100 borrowed, amounting to a 391% annual percentage rate.

This film stresses that it is time for change. The idea is that new technology, new ideas and encouraging dialogue around this issue can help make managing money simple and more affordable.

The Unbanked: Offering Small Fees, Banks Cater to Low-Income Customers [NY Times]

In addition to sponsoring the film, American Express is also spearheading several initiatives to drive innovation in financial services to help improve the financial options available to those who are financially under-served.

Payday Loans

The film’s website, SpentMovie.com, encourages viewer to find out more and take action. Suggested actions include hosting a screening, supporting financial inclusion initiatives and advocating for veterans.

Hosting a screening provides an opportunity for family, friends and co-workers to view the movie together and then discuss the issue of access to the traditional finance system.

The Financial Inclusion Initiative will look for start-ups working on solutions such as: providing greater access to capital, developing new credit building models, enhancing personal financial management and promoting savings.

Like many young Americans, veterans receive inadequate support to deal with the new financial challenges that they face as they transition back to civilian life after service. This summer, American Express is working with The Association for Financial Counseling and Planning Education (AFCPE) to design a financial readiness program for transitioning service members, veterans, and their families.

Also available for viewing on the Spent Movie website and YouTube.

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What is Your Pension Worth?

Pension ValueThe defined benefit plan, more commonly known as a pension, is becoming more rare. I touch on this phenomenon in my book RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit (I often use RWR as shorthand) and numerous posts on this blog, including the recent post, Pensions. Going, Going … . Although they are becoming more rare, some workers – including myself and my wife – are still on track to receive a pension from their current employer.

If you are on track to receive a pension, it is likely that your employer has provided some guidance as to what your projected pension will be, or if you are like me, you have done the calculation yourself based on your employer’s benefit formula. Most benefit formulas consider factors such as the number of years of employment, pay and a given percentage. As an example, my employer uses the following formula for those that retire before age 62: 1% × High-3 Average Pay × Years Service. This is how it would look for someone who worked 30 years, 4 months (4/12 years or 30.33) when their highest three years – typically the final three – of salary averaged $100,000 … 01 × 100,000 × 30.33 = $30,330.

Using a nice even number, say $20,000, what would be the dollar value of that $20,000 be in retirement? In other words, we typically track the value of our retirement plans (e.g. 401(k) and IRAs) and have a target number (e.g. $500,000) in mind for the day we retire. How would we convert that $20,000 pension to a comparable retirement plan number? Is a $20,000 annual pension equivalent to a $500,000 401(k) account balance? Is it worth more, less?

With $20,000 as the first relevant number, let’s look at the second relevant number, the number of years most planners assume people will spend in retirement, or at least should plan to spend in retirement, 30 years. With those two numbers we could just use the very simple formula, Number of years (30) x Annual Pension ($20,000) to get $600,000. That’s it, right? Not quite. The problem is that number does not account for inflation.

As I touch on in RWR, while one part of retirement planning is science – in that some things are known and quantifiable – other parts of retirement planning are art, meaning that some assumptions/projections have to be made. Accounting for inflation is an example of art since none of us know what it will be over the 30 years you might spend in retirement. Therefore, we’ll take a look at a couple different assumptions/projections to get a sense of the difference.

Using an inflation calculator – the results below are from the Inflation Calculator, a complementary tool to RWR, available as a free download – we get the following for 1% and 1.5% inflation on $600,000. Note that Required Amount is what would be required for the future amount to retain the same value as the present amount and Reduced Amount shows the reduced value of the present amount after inflation is accounted for over a given number of years:

Grouped Inflation Calculators

As you can see, inflation can have a significant impact on the value of your money and it can vary depending on the level of inflation. So there you have it, once we account for inflation, we can project that a $20,000 annual pension is roughly comparable to a $445,153.75 401(k) or IRA account balance, at an annual inflation rate of 1.0%; or $383,857.46 at an inflation rate of 1.5%. Of course, if your employer’s defined benefit plan includes a Cost of Living Adjustment (COLA) that matches the previous year’s rate of inflation, the impact of inflation would be negated. Unfortunately however, not all benefit plans provide a COLA, or if they do, they may not offset the full rate of inflation.

On a side note, I recently finished Capital in the Twenty-First Century – a book by Thomas Piketty that I highly recommend – which discusses the accumulation and distribution of capital and its impact on economic growth, the concentration of wealth and inequality. The author finished with an observation which I wanted to share with readers: ” … and yet it seems to me that all social scientists, all journalists and commentators, all activists in the unions and in politics of whatever stripe, and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it and its history. Those who have a lot of it never fail to defend their interest. Refusing to deal with numbers rarely serves the interests of the less well off.” Great food for thought.

Are you poised to receive a pension from one or more  employers? Have you ever attempted to assign a value to that pension(s)?

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Pensions. Going, Going …

Pensions and DoDosAs Congress prepares to finish up the $1.1. trillion spending bill required to keep the government open, a deal that will significantly impact pension plans is coming into focus. If you believe this deal is about ‘saving’ or ‘fixing’ pensions,  you haven’t been paying attention.

The Congressional proposal would allow plans that are projected to run out of money in the next 10 to 20 years to cut the benefits they pay to both current and future retirees. Provisions include those that would raise premiums, allow troubled pension plans covering more than one employer to cut retiree benefits, allow troubled plans to merge with healthier plans, and double the insurance premiums employers pay the Pension Benefit Guaranty Corporation (PBGC), the government agency that insures pension plans.

How many people could be impacted by legislative changes? According to the Bureau of Labor Statistics, about a quarter of the roughly 40 million workers – primarily in the trucking, manufacturing and other industries – who participate in a traditional defined benefit plans are covered by multiemployer plans. A quick note, A multiemployer plan, sometimes referred to as a ‘Taft-Hardy’ plan, is a collectively bargained plan maintained by more than one employer, usually within the same or related industries, and a labor union. These PBGC insurance programs were created as part of ERISA in 1974 to protect retirees’ pension benefits.

An Analysis of Multiemployer Plans [Bureau of Labor Statistics]

Under the proposal, benefits would not be cut for disabled pensioners or those 80 years and older, while cuts would be lessened for those between 75 and 80. The PBGC projects that more than 10% of the roughly 1,400 multiemployer pension plans, which cover more than 1 million workers and retirees, currently meet this criteria. As the law is currently written, cutting the benefits of those who are already retired is off-limits. Instead, troubled multiemployer plans can take other actions, like reducing the benefits employees earn going forward and raising employee and employer contributions to the plan.

Supporters of the legislation opine that the benefit cuts, along with other changes included in the legislation, will help preserve the plans for both retirees and current workers. Opponents, such as the AARP and the Pension Rights Center, argue that the other measures should be taken before slashing benefits. An example of the potential impact to an individual? An example I have seen, for a retired truck driver that is covered by a multiemployer plan, notes that his pension would go from $40,000 to as low as $15,000.

Plots Against Pensions [RetirementSavvy]

A plausible case could likely be made that this action is needed now, particularly after the PBGC noted last month that their reserves are running dangerously low and many larger employers have pulled out of the multiemployer plans. However, anyone that has been following the many stories – I have been following the story of Detroit quite closely – detailing the state of both public and private pensions knows that this is just one point on a long arc, one that ends with the demise of public and private pensions.

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The Silver App

Silver Mobile ApplicationCreated by graduates of Wharton and the Harvard Business School, Silver was born out of the frustration of receiving an overwhelming influx of credit card offers.

With constantly fluctuating rates and available services, the developers of the Silver mobile app understand how difficult and time-consuming it can be to research and compare the plethora of credit cards that exist in the market.

This new mobile application helps users find the best credit cards in seconds, view relevant details and even lets users apply directly from their mobile device. With Silver, users can stay on top of their credit cards so they never miss a renewal or get hit with annual fee & interest fees again.

Silver uses a unique algorithm to ensure finding the credit cards that make the most sense is quick and painless. Users answer a short questionnaire that reveals what they are looking for in a credit card. From better interest rates to exclusive services and perks, Silver reviews users’ answers to provide them with a comprehensive list of credit cards that match their needs. Hundreds of cards can be instantly compared using the app’s easy-to-use and intuitive interface. Once users find the cards they are interested in, they can view card details, apply and even be instantly approved from their mobile device.

Silver Mobile Application Banner

Silver is available for free on Android and iOS. Take a quick trip to YouTube to view the official trailer.

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Living Frugally: Less Waste

Adopt a More Frugal LifestyleI would like to take you on a mental journey to a place of less … less consumption, less waste, less spending, less accumulation of stuff. In this place, less actually leads to more – I see your forehead wrinkling but stay with me. Less spending yields more saving and less consumption yields more contentment.

In our American culture, being frugal is sometimes synonymous with being a tightwad, penny pincher or cheapskate. We are all about the latest gadgets, the newest models, and the most expensive everything. But let’s think for a second. How is it that folks featured in the books The Millionaire Mind and The Millionaire Next Door are ordinary folks with ordinary jobs yet have bank accounts that most of us only dream about? The answer is frugality.

See, these self-made millionaires are frugal with their incomes. That is why they’re millionaires. They don’t spend money on the big boat, high-priced vehicles, fancy eateries, designer clothes, etc. On the contrary, they’re completely content with a used … sorry, certified pre-owned … American made car, no-name clothing and eating meals at home. They save the money most would spend on a yacht to pay for their child’s education instead – 100% cash, no financing. These folks frequent thrift shops. There they find both designer and non-designer clothing at half the price, or less. What does this mean in the long run? Simple: They keep a higher percentage of their paychecks than you do!

So with that in mind, let’s explore how you can put yourself on Frugalist Street. We’ll concentrate on how it will affect you, specifically thinking of, “How will being frugal help me retire financially free?”

Consider how much you spend on things you really don’t need. Let’s take that cable/satellite package you’ll be using to entertain your friends this season. At ninety dollars a month you are spending $1,080 a year on a ton of channels, knowing you won’t watch most of them. Now, take the number of years between your present age and age 65. For me that’s 27 years. When we multiply 27 by the annual cost of that cable package we get a whopping $29,160! Yeah I was also shocked when I did the math.

SavvyCompoundInterestThat’s how much money you could have in the bank at retirement age if you decided to live frugally by watching the games at a sports bar instead of paying for it at home. Keep in mind this number is before compound interest is calculated over that 27 year period. Imagine the places you could visit during retirement if you lived as a Frugalist now. Imagine being able to help someone in need or donate to charities if you were disciplined enough to spend less now.

My encouragement for now – for your sake and those of your loved ones – is to decide to live the Frugalist lifestyle. You will not regret it.

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