In this episode Dr. O’Neill discusses some of the key concepts from her December 18 webinar, 2018 Personal Finance Year in Review – a 90-minute webinar that takes a look back at the events, legislation, and trends that shaped finances this year.
What stood out to you most as you reviewed the 2018 events to research the webinar and write the accompanying journal article?
I think that one thing that really hit home to me was the impact that the finances of one generation are having on the finances of another. So there was one study that I found where 4 of 5 parents of adult children were providing some type of financial support often to the detriment of their own retirement savings. I think that kind of speaks to the intergenerational connectedness of personal finance, particularly when you have different generations living under the same roof. Another article that I found talked about now that many millennials are moving out and getting houses of their own this will allow their parents to finally be able to downsize and maybe move if they want to. Another thing that really struck me was the meteoric rise of sports betting in this country. This is huge. It’s kind of based in New Jersey where I live, so maybe we’re seeing it more than others. I think it only can grow. In May, New Jersey won Supreme Court case which removed the federal ban on sports betting across the entire United States. As a result, people can make mobile bets on casino accounts anywhere in a state that allows it, so this is really going to expand the available options for gambling. In New Jersey in July, which is the first full month that it was legal, they took in 40.6 million dollars in sports betting wages. By the end of October more than half a billion dollars was bet on sports at our state casinos, race tracks, and anywhere in the state that has a mobile device. There’s been articles written about how people are driving over the borders from Delaware, Pennsylvania, New York City. They’re crossing the bridges, just getting right over the bridge, and as soon as their mobile phone is in New Jersey air space, they’re doing a lot of gambling. I think this is something that financial counselors should be very concerned about. Another thing that stuck out to me was that in 2018 Social Security reached a tipping point for the first year since 1982. The program’s costs are going to exceed its income, and this will start to force the Social Security program to its nearly 3 trillion dollar trust fund to pay benefits. These are things that really caught my attention.
So what do the 2019 retirement planning research studies that you presented tell us?
As I mentioned before, many people are putting their children’s interests ahead of theirs and not saving as much money as they possibly could if they weren’t diverting all of this money to supporting their adult children. Many people are unprepared. I presented the latest Retirement Confidence Survey findings, and they found that only 64% of their respondents had saved any money for retirement. 45% of the savers had less then $25,000 saved, and 26% had less than $1,000 saved. Not a lot of savings are being set aside. Also, an interesting study found that working longer has the most impact versus saving more for people once they reach their early 50s. You’re going to get much better sustainability of your funds if you work longer than if you just try to save more but at a much later age. Also, research showed that if you show people income estimates from additional savings (e.g. if you save X dollars more, you’ll have Y dollars more per month to spend in retirement), that was very motivating for people versus just telling them information in percentages or probabilities. People wanted to see the dollars. That made the most impact. Also, there was an interesting study about how husbands don’t consider wives likelihood of widowhood in Social Security claiming decisions. It was kind of an online experiment where they provided information about what happens when widows are left without an adequate income and didn’t seem to make a difference, so I thought that was kind of interesting and speaks to the need for financial practitioners to perhaps be a little bit more emphatic about the needs of the surviving spouse.
So what were some of the positive personal finance trends of 2018?
Well, we had some real positive things. First of all, there was a record low level of unbanked Americans, so that’s a good thing. More Americans, particularly people in minority groups, now have a financial relationship with a financial institution like a bank or a credit union. Also, we’ve had a low unemployment rate. It reached 3.7% in October and was kind of sliding down throughout the entire year, so that’s a good thing. Kind of along with that, there’s been an increase in wages, and this has been particularly beneficial to people who are in the lower paid positions in our country. They’re starting to see at least some increase in their wages, and of course we’re seeing more and more conversations about a guaranteed minimum wage, whether it’s $15 an hour or some other number. Also, we’re going to see this year a tax form simplification. Instead of having a whole longer 1040 form and many forms and schedules, the IRS has basically simplified the 2018 tax form that we’ll be filing early next year into two half sheets of paper and six additional schedules/worksheets that kind of go along with it. So people will probably be spending a whole lot less time doing their taxes or preparing their taxes to be transferred to a paid preparer than they would have in the past. We’re also seeing states step up and sponsor retirement plans for private sector workers in the wake last year of the federal government discontinuing the MIRA program. Some states, actually ten of them now, have stepped up and developed programs where small employers particularly can basically take the savings out of their workers paychecks and put it into a Roth IRA for them. It gives them the benefit of paycheck deduction to try to do some savings for retirement, so that’s very positive. Also, very important are the new Medicare cards without social security numbers, so that’s a step forward to help avoid identity theft. Although, having said that, I would just point out that there have been many associated frauds with that too. People have taken advantage of that and tried to confuse older adults and say, “Hey, you’ve got to activate the card. You need to give us this information.” People have to be aware of the frauds that are associated around that too.
So what were some of the 2018 personal finance trends that concerned you?
As I mentioned before, continued evidence of lack of preparation for retirement. There were a number of studies that just point out that people just are inadequately prepared to maintain their lifestyle after retirement. Also, the CFSI (Center for Financial Services Innovation) had a survey. It was their inaugural survey. They’re calling it the Financial Health Pulse Survey, and they found that only 28% of Americans are considered financially healthy. They had 8 different metrics of what constitutes financial health. Only 28% of Americans met all of their metrics. Also, the Federal Reserve had a study that said 4 in 10 adults could not pay an unexpected $400 expense without either borrowing money or selling something to come up with money. That’s very concerning. Also, there’s increased reporting around lower life expectancy. There were several studies that mentioned that we’re actually going in the wrong direction in this country. A lot of it has to do with what they’re calling deaths of despair, and a lot of that is related to opiod deaths, alcoholism, and things of that sort. That’s always concerning when you see the life expectancy of your country going down. Also, another thing that we need to watch as financial practitioners is the increase in personal loan access and consumer debt. There were some articles that talked about personal loans. Many people these days are making these unsecured personal loans. They don’t want to use credit cards, and they don’t want to tap home equity and take out a home equity loan. They’re taking on these unsecured personal loans either to consolidate debt or to make a one time large purchase. The thing to realize is that, in this year, 36% of these loans were originated by fin tech (financial technology companies). People are doing it often on a mobile phone. 36% in 2018 versus less than 1% in 2010. Clearly, this ease of personal loan access is something for financial advisors to watch with their clients because it’s going to be a whole lot easier. People don’t have to go to a bank anymore. They don’t have to fill out any paperwork. They can simply start taking out a lot of loans on their mobile phone, so that needs to be watched.
What were some of the key government laws or policy changes that affected personal finances in 2018?
One is we’re in the first full year after the passage of the Tax Cuts and Jobs Act last December, so there are many concerns about people who will be under-withheld for their income taxes in 2018. Some of the estimates that I’ve read say that the people who need to be most concerned about this are people who don’t have children, people whose children have aged out of being able to get any tax benefit for those children- they may still be living at home, but you can’t claim them on your income tax- people living in high tax states, and people who have household incomes between $100-200,000 who formally itemized before and did not formally take the alternative minimum tax. Those are some of the people that will especially want to watch their tax withholding. Also, the other thing related to taxes is that the Treasury Department blocked any of the high tax states like mine from classifying their state income taxes as a charitable contribution. It was a nice try, but it didn’t work. Also, as I mentioned before, the new Medicare cards came out, but people have to watch the associated fraud that came with that. Another good policy is that free credit freezes and unfreezes became available nation-wide. Up until this year, it was kind of a patchwork of laws. Every state had their own laws. Some were charging $10. Some were charging $5, and some were free. Now it’s free nation-wide to freeze your credit, to unfreeze your credit, to get a one year fraud alert, and also to get a credit freeze on a child under 16. That is also available now because there’s also a lot of child identity theft as well as adult identity theft. Two other issues: the Supreme Court ruled that states can tax the online purchases of their state residents. Expect to see that you’re now going to have to pay sales tax when you order things online, which will of course increase the cost of your items. On the other hand, your state will have more revenue to perhaps provide some services, so there’s kind of a flip side to that too. Also, a big change is for service members. The full implementation of the Blended Retirement System took place this year, and this is the year for people who have eligibility to choose one plan or the other have to make the decision by year end.