Americans Continue To Show Inadequate Levels of Financial Literacy

Americans Continue To Show Inadequate Levels of Financial Literacy

A large share of Americans lack the knowledge associated with making sound financial decisions, and financial literacy levels are especially low in the area of comprehending risk, according to the findings of an annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business.

This second wave of the “P-Fin Index” survey was conducted online in January 2018 with a nationally representative sample of 1,012 U.S. adults aged 18 or older. The results of the survey were presented in a report released on April 4. To compile the index, the researchers asked respondents 28 core questions, with three or four questions devoted to each of the eight areas of functional financial knowledge covered in the survey: earning, consuming, saving, investing, borrowing/managing debt, insuring, comprehending risk, and go-to information sources.

On average, the respondents answered only 50% of the 28 survey questions correctly. While 16% of the respondents demonstrated a relatively high level of personal finance knowledge and understanding by answering more than 75% of the index questions correctly, 21% showed a relatively low level of knowledge by answering 25% or fewer of the questions correctly.

The results further showed that financial literacy is the lowest in the area of comprehending risk, as, on average, just 35% of the questions on risk were answered correctly. According to the report’s authors, this finding is in line with other research identifying risk-related concepts as the most difficult for individuals to grasp, and is consistent with the findings from the 2017 P-Fin Index.

However, the survey also revealed that personal finance knowledge levels were relatively high on the topics of borrowing and debt management: on average, 60% of the questions on those subjects were answered correctly. Researchers speculated that for many individuals, knowledge and understanding of debt-related topics may emerge from confronting accumulated debt across the life cycle, often starting with student loans.

Moreover, the survey showed that financial literacy levels varied across demographic groups. Financial literacy was found to be significantly higher among men than women, as 21% of the male respondents, but just 12% of the female respondents, answered 75% of the survey questions correctly. Older respondents were also shown to have more financial knowledge than younger respondents: 7% of the respondents aged 18-28, but 22% of the respondents aged 60+, answered 75% of the survey questions correctly. Financial knowledge was also found to increase with income, as 30% of the respondents with an annual income of $100,000+, compared with 15% of respondents with an annual income of $50,000-$99,999, answered 75% of the survey questions correctly.

Not surprisingly, financial knowledge was shown to increase with education, with 33% of respondents with a college degree answering 75% of the survey questions correctly, compared to 6% with a high school degree only. However, the results indicated that respondents who reported that they have participated in a financial education class or program answered more of the questions correctly on average than those who had not: 24% of those who had received financial education answered 75% of the survey questions correctly, versus 13% of those who had not.

The survey also looked at how the financial knowledge levels of the respondents correlated with their financial outcomes. The findings indicated that of those respondents who said they certainly or probably could not come up with $2,000 if an unexpected need arose within the next month, 49% answered less than 26% of the survey questions correctly, while just 8% answered 75% of the survey questions correctly. Moreover, of the non-retirees who reported that they have tried to figure out how much they need to save for retirement, only 22% answered less than 26% of the survey questions correctly, while 65% answered 75% of the survey questions correctly.

From Benefit Trends Newsletter, Volume 61, Issue 5

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Impact of The Tax Cuts And Jobs Act On Employee Benefits

Impact of The Tax Cuts And Jobs Act On Employee Benefits

The Tax Cuts and Jobs Act (TCJA) of 2017, which received final approval from both houses of Congress on December 20 and was signed into law two days later, is the first sweeping overhaul of the tax code in more than three decades. In addition to reforming the marginal rate structure and deductions for individuals, slashing the top corporate tax rate from 35% to 21%, creating a new 20% deduction for pass-through businesses, and zeroing out the Affordable Care Act individual mandate penalty starting in 2019, the law includes a number of provisions that specifically affect executive compensation and employee benefits.

The new law makes a number of changes to executive compensation rules. Under Section 162(m) of the Internal Revenue Code, the deductibility for publicly traded companies of compensation paid to the CEO and the other three highest compensated officers other than the CFO was limited to $1 million annually, but this limit did not apply to performance-based compensation, including stock options and commissions. Starting in 2018, the exemption for commission- and performance-based compensation is removed, and the covered group of employees is expanded to include the CEO and the CFO, as well as the three other highest-compensated officers.

The TCJA also changes the rules for qualified equity grants to employees. Under prior law, a qualified employee was generally required to include stock-based compensation in his or her income in the year in which the employer transferred the stock to the employee, or in which there was no longer a substantial risk of forfeiture, regardless of whether the stock was tradable on an established securities market. Starting in 2018, the TCJA allows private companies to give employees the opportunity to defer taxation for up to five years on income attributable to stock received following a stock option exercise or settlement of a restricted stock unit if the stock is not tradable on an established securities market.

In addition, the legislation eliminated or restricted several employer deductions for employee expenses. Whereas under prior law, employers could provide moving reimbursements on a tax-free basis to employees; under the new law, the tax deduction for moving reimbursements is suspended through 2025 for most employees. Moreover, beginning in 2018, the TCJA repeals the business deduction for the cost of providing employees with parking or transit passes (worth up to $255 per month per employee in 2017), except as necessary for ensuring the safety of the employee. However, employees are still permitted to pay for their own mass transit or workplace parking passes using pretax income through an employer-sponsored salary deduction program. The qualified bicycle commuting reimbursement, which allows employees to exclude from their income qualified bicycle commuting reimbursements of up to $20 per qualifying bicycle commuting month, is suspended through 2025.

Under prior law, employee achievement awards for length of service or safety achievements could be excluded from an employee’s income if certain conditions were met. Under the TCJA, such awards are deductible only if they qualify as tangible personal property starting in 2018. Thus, in most cases the deduction will no longer be available for awards in the form of cash, gift coupons or certificates, vacations, tickets to sporting or theater events, or similar items.

The TCJA also allows employers to claim a new Federal tax credit of between 12.5% and 25% for wages paid to employees who are taking leave under the Family and Medical Leave Act (FMLA). To be eligible for the credit, employers must pay employees on leave at least 50% of their regular earnings, and must provide paid leave to all qualifying full-time and part-time employees. However, this credit is available for 2018 and 2019 only.

In addition, the TCJA includes some modifications to the rules on qualified retirement plans. Under the new law, a traditional IRA that has been converted to a Roth IRA cannot be converted back to a traditional IRA. The legislation also extends the rollover period for defined contribution plan loan offset amounts that result from separation from employment by permitting these rollovers to occur as late as the due date for filing the employee’s tax return for the year of separation.

From Benefit Trends Newsletter, Volume 61, Issue 1

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Americans Express Interest in Lifetime Income Options

Americans Express Interest in Lifetime Income Options

While a majority of Americans say they are confident that they will have sufficient income in retirement, large shares also express interest in purchasing a financial product that would provide them with a guaranteed monthly income in retirement, according to the results of a survey conducted by the Teachers Insurance and Annuity Association of America (TIAA).

The survey of 1,000 U.S. adults conducted in June 2016 showed that 58% feel confident that they can successfully turn their retirement savings into income after they stop working, and that only 35% are concerned about running out of money in retirement. Researchers pointed out, however, that this confidence could be misplaced, as only 46% of respondents indicated that they know how much they have saved in their retirement savings accounts, and just 35% said they know how much monthly income they will have in retirement.

The results also provided evidence that Americans are underestimating their retirement income needs. Of the respondents who are not currently retired, 41% said they are saving 10% or less of their income for retirement, and 63% estimated that they will need less than 75% of their current income to live comfortably in retirement. In addition, of the 28% of respondents who are not retired and indicated they are not saving anything for retirement, just 47% said they are worried about not having enough money in retirement.

Yet when asked to name the retirement plan feature they consider to be most important, 49% of respondents said the plan should provide a guaranteed monthly income in retirement. Moreover, when offered a choice among several lifetime benefits, 68% of the adults surveyed chose a retirement “paycheck” that lasts as long as they live over options like an unlimited lifetime airline ticket (9%), a new car every year for the rest of their life (9%), or unlimited dining out (4%). However, only 43% of respondents said they are willing to commit a portion of their retirement savings to a choice that would allow them to receive a monthly payment for life, and 41% said they are unsure whether their current retirement plan provides an option for lifetime income.

When asked to identify the specific sources of income they expect to draw from in retirement, 73% of respondents said they expect to rely on Social Security; 29% said they anticipate receiving payments from a defined benefit pension plan; 54% indicated they intend to make withdrawals from retirement accounts like 401(k)s, 403(b)s, or IRAs; and 14% said they plan to use annuities to generate an income.

The survey also found that while most respondents expressed a desire to have reliable monthly income in retirement, the vehicles they expect to use to generate that income differ by generation and by income level. For example, 84% of the baby boomer respondents said they plan to rely on Social Security for retirement income, compared to 69% of Gen X and 61% of Gen Y respondents. By contrast, the Gen X and Gen Y respondents were more likely than the baby boomers to say they plan to make withdrawals from retirement accounts.

Of the generations surveyed, millennials were less likely to say they are familiar with annuities (20%) than Gen Xers (38%) and baby boomers (41%). However, millennial respondents were more likely than older respondents to say they would be willing to commit a portion of their retirement savings to a product that will provide them with a monthly payment for life.

Broken down by income, the survey showed that respondents with incomes over $100,000 per year were more likely to say they expect to draw from a wide array of income sources than people with incomes under $50,000 per year. For example, 69% of respondents at the higher income level said they intend to withdraw savings from a retirement plan, compared to 41% of respondents at the lower income level. The higher income respondents were also more likely than their lower income counterparts to say they expect to receive payments from a pension plan (40% vs. 19%) or income from annuities (27% vs. 10%).

From Benefit Trends Newsletter, Volume 59, Issue 10

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2016 Liberty Publishing, Inc. All rights reserved.

Workers Show Signs Of Becoming More Financially Savvy

Workers Show Signs Of Becoming More Financially Savvy

Employees are becoming more proactive about their finances and are taking steps to assess their personal financial situations, but employers could do more to help change the financial trajectory of the millennial generation in particular, a new report by financial education provider Financial Finesse stressed.

The findings of the “Generational Research 2016” report are based primarily on the analysis of 35,703 financial wellness assessments that measure how well employees are managing their finances. The assessments were completed by employees between January 1, 2014 and December 31, 2015.

The analysis found that employees with higher financial wellness scores, as measured on a scale of zero to 10, also had higher contribution rates to an employer-sponsored retirement plan: the results showed that employees with financial wellness scores of 4.0, 5.0, or 6.0 had average deferral rates of 6.57%, 7.38%, and 8.37%, respectively.

The focus of the analysis was on the differences between the generations in their approaches to managing their finances. Not surprisingly, baby boomers (aged 55+) were found to have the highest overall financial wellness score of the generations, at 5.7; compared with 4.8 for generation Xers (aged 30 to 54) and 4.4 for millennials (under age 30).

The results indicated that in 2015, 78% of baby boomers had basic investment knowledge, 50% had run a retirement calculator, 56% were checking their credit score annually, and 45% knew how much to save for college education. When asked to rank their financial priorities, the baby boomers overwhelmingly selected retirement planning (91%), followed by investment planning (39%) and getting out of debt (34%). When asked to identify their main financial vulnerabilities, the top response was not saving enough for retirement (63%), followed by inadequate wealth protection (46%) and a lack of emergency savings (33%).

The 2015 findings for generation X showed that 38% had used a retirement calculator, 60% were checking their credit score annually, and 23% knew how much they have to save for college education. While the members of this age group chose retirement planning as their top financial priority (73%), they also ranked getting out of debt (55%) and managing cash flow (51%) as important considerations. Their most frequently cited vulnerabilities were not saving enough for retirement (56%), a lack of emergency savings (53%), and living beyond their means (40%).

Meanwhile, the 2015 results for millennials indicated that 23% had used a retirement calculator, 61% were checking their credit score annually, and 22% knew how much they have to save for college education. The top financial priority cited by the millennials was managing cash flow (74%), followed by getting out of debt (61%) and retirement planning (51%). However, these young adults rated not saving enough for retirement (60%) and a lack of emergency savings (60%) as their top two vulnerabilities, followed by serious debt (43%).

While 73% of millennials reported that they contribute to their company’s retirement plan, the findings suggest they were lagging behind generation X in longer term goals like investing and retirement planning by substantial margins. Researchers observed that this may be because millennials tend to have a “free agent” mindset, which leads them to focus less on retirement than older generations.

The report emphasized that employees of all generations appear to be increasingly likely to “run their numbers” to calculate where they stand currently with key financial goals, and are beginning to understand what changes they need to make to their money management, savings, and investing strategies to reach these goals. However, researchers also recommended that employers use financial coaching programs to help employees overcome biases such as the tendency to value satisfaction today over future satisfaction, and to neglect the value of compounding.

Benefits Trends, Volume 59, Issue 7

The information contained in this post is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. The information in this post is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2016 Liberty Publishing, Inc. All rights reserved.

Americans Lack Confidence In Ability to Save for Retirement

Americans Lack Confidence In Ability to Save for Retirement

While a majority of Americans continue to lack confidence in their ability to save enough for retirement, those who have access to a retirement plan at work are somewhat more confident about their financial future, and are considerably more likely to have set retirement savings goals than those who do not have a workplace plan, the results of a survey conducted by Plan Sponsor indicated.

The survey of 1,035 employed adults ages 23 and older was conducted in March 2016. The survey is designed to examine the retirement planning attitudes and behaviors of American workers, regardless of whether they participate in an employer-sponsored retirement plan.

Just 29.8% of respondents said they are either confident or very confident that they will achieve their retirement goals—a share that researchers noted was the lowest in the survey’s three-year history. The results also showed that just 28.1% of the adults surveyed said they have a retirement goal, 24.1% said they use a financial adviser, 34.2% indicated they have a family budget, and 53.7% said they have at least $5,000 in an emergency fund. When asked about the amount they have saved for retirement, 41% of respondents reported that they have less than $50,000 in savings, 31.5% said they have between $50,000 and $250,000, and 21% said they have more than $250,000.

Compared to the respondents who reported saving less than $50,000, the respondents who said they had saved more than $250,000 were three times more likely to indicate they have a retirement savings goal, and more than four times as likely to say they work with a financial adviser. The survey also showed that the respondents with access to a defined contribution plan at work were twice as likely to have established retirement goals as those without access (30.8% vs. 15.3%)

When the respondents with access to an employer-provided retirement plan were asked about their deferral rate, just 17.4% said they are deferring more than 10%, while 42.8% said they are deferring
less than 6%. Not surprisingly, younger people are saving less than older people: only slightly more than 30% of respondents ages 50 and younger reported having a deferral rate of more than 6%, compared with 48.6% over age 50.

The survey also indicated that while 44.6% of respondents under age 30 said they would like to receive more financial education at work, only 34.9% of this group said they always read plan communications, compared with 54.2% over age 50.

The findings further showed that 87.4% of respondents who said they are usually or always living paycheck to paycheck have little or no confidence that they will have a secure retirement. Moreover, even among the respondents who said they are confident or very confident that they will be able to achieve their retirement goals, 58.8% estimate that they will need to replace less than 70% of their current income—a figure that researchers pointed out is considerably lower than the 85% often cited in the industry.

Benefits Trends, Volume 59, Issue 6

The information contained in this post is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. The information in this post is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2016 Liberty Publishing, Inc. All rights reserved.

Baby Boomers Lack Confidence in Their Retirement Readiness

Less than one-quarter of baby boomers say they are confident they are ready for retirement, and just over one-half report having any retirement savings at all, according to the results of a survey conducted by the Insured Retirement Institute (IRI).

The survey of 800 Americans aged 53 to 69, conducted February 9-11, 2016, found that just 24% of respondents are confident they will have enough savings to last throughout their retirement years. Researchers pointed out that this is the lowest level in the six years the IRI has been conducting this survey: in 2011, for example, 37% of the boomers polled expressed confidence that they had saved enough for retirement.

Overall, the results indicated that the baby boomers surveyed have very low levels of confidence in their financial readiness for retirement: just 22% said they believe they are doing a good job in preparing for retirement, only 27% said they are confident that their savings will be sufficient to cover health care costs in retirement, and just 16% said they are confident they can cover the cost of long-term care.

Of the baby boomers surveyed, 55% reported having retirement savings, and of those who indicated that they have savings, 42% said they have saved less than $100,000, 29% said they have saved between $100,000 and $250,000, and another 29% indicated they have saved more than $250,000.

The survey also showed that the respondents who reported that they lack confidence in their retirement security expressed some common regrets, with 68% saying they wish they had saved more, and 67% saying they wish they started saving earlier. By contrast, just 27% said they regret not having maximized their employer plan benefits.

The findings further indicated that significant shares of baby boomers are delaying retirement: 30% of respondents said they had postponed their plans to retire in the past year, and 59% said they now plan to retire at age 65 or older. Researchers observed that while just 17% of the baby boomers surveyed in 2011 said they plan to retire at age 70 or older, this figure had risen to 26% in the most recent survey.

When asked what they would do if they exhausted their financial resources in retirement, 71% of respondents said they would try to cut back to rely only on Social Security, 54% said they would try to return to work, 22% said they would rely on charity, and 19% said they would seek help from their children or other family members.

The findings also revealed that baby boomers are losing confidence that they will be able to leave an inheritance to their children: just 46% of respondents in the 2016 survey said they believe it is important to leave money to heirs, down from a high of 67% in 2013.

In addition, the survey found that significant shares of baby boomers are currently facing financial difficulties: 30% reported that they have stopped contributing to retirement accounts, 30% said they have found it more difficult to pay their mortgage or rent, and 16% said they have taken premature withdrawals from their retirement accounts.

The survey also showed, however, that the boomers who have consulted financial professionals are more confident on average: although only 27% said they work with a financial professional, 80% of this group indicated that they feel better prepared for retirement as a result, and 78% of this group reported that they have at least $100,000 saved for retirement.

From Benefit Trends Newsletter, Volume 59, Issue 5

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2016 Liberty Publishing, Inc. All rights reserved.