Makin' Money - Most Recent
Budget blueprints and 401(k)s
Serious proposals to deal with the federal government's debt and deficit often involve changes to the treatment of 401(k) plans (and other retirement savings plans).
For example, the National Commission on Fiscal Responsibility and Reform -- better known as Simpson-Bowles -- proposed a tax reform plan that would cap annual "tax-preferred contributions to [the] lower of $20,000 or 20% of income." The Employee Benefits Research Institute (EBRI) calculated the impact of that proposal and another debt-and-deficit reduction blueprint by William Gale, economist at Brookings Institution in Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances. The result:
A recent proposal to change the tax preferences for employment-based 401(k) retirement plans could result in an average reduction in 401(k) account balances of between 6-22 percent at Social Security normal retirement age for workers currently ages 26-35, according to new research by the nonpartisan Employee Benefit Research Institute (EBRI).
The response -- a combination of plan sponsor reaction and participant response -- is strongly tied to plan size, with participants in smaller plans likely to experience deeper average reductions in 401(k) balances, according to EBRI’s baseline analysis. For plans with less than $10 million in assets, participant balances at Social Security normal retirement age for workers currently ages 26-35 could decline between 23-40 percent, depending on the size of the plan and income of the participant.
Comprehensive tax reform isn't going to be easy.
Money, aging and independence
The Wall Street Journal reports that an independent insurance agent was ordered to spend 90 days in jail for selling an "indexed" annuity to an 83-year-old woman who prosecutors alleged had shown signs of dementia. Annuity Case Chills Insurance Agents focuses on the impact the ruling is having on the industry.
The case underlines authorities' continuing discomfort with "indexed" annuities, savings products that pay interest tied to the performance of stock- and bond-market indexes. Insurers guarantee that buyers won't lose any of their principal but in return charge sometimes-steep penalties if investors withdraw their money early, for periods that can stretch beyond a decade.
I'm not a fan of indexed annuities. The product is too complex and opaque. However, the article reminded me of a much more troubling trend: Older people and their money. It's difficult to figure out how to protect older people when they're independent and competent in many aspects of their lives, yet they're easily overwhelmed and taken advantage of when it comes to financial products. The wishes of competent older people should be heeded and respected. Yet subtle signs of deterioration show up early with money, a concern powerfully illustrated in this New York Times article, Money Woes Can Be Early Clue to Alzheimer's. How can we protect their finances of the elderly without taking away their independence?
There are no easy answers. Finding the right balance will be one of the biggest struggles in personal finance over the next several decades with the aging of the population. The law, regulators, financial advisors, and other major financial players will all have to change and adapt.
Good sign for the economy, but ...
Bloomberg reports that the Top Money Funds Doubled French Bank Holdings Last Month.
The 10 biggest prime U.S. money market mutual funds more than doubled their holdings in French banks in February, as lending from the European Central Bank bolstered investor confidence. French bank holdings rose to $18.2 billion from $8.8 billion in the month, according to data compiled and published in today’s Bloomberg Risk newsletter. Funds run by New York- based JPMorgan Chase & Co. (JPM) and Boston’s Fidelity Investments accounted for one-third of the total increase.
I love France. The food. The universal early childhood care network. Still, do most money market mutual fund investors know that their funds are hiking their exposure to Eureopean debt?
That said, the increased investments in high-quality short-term European debt is a vote of confidence that the Continent's turmoil is abating somewhat. It suggests we're entering a period of greater stability -- fingers crossed -- which would give room for the U.S. economy to continue expanding. (The Middle East is another story).
Financial fraud is on the rise. Americans submitted more than 1.5 million complaints about financial and other types of fraud in 2011. That's a 62 percent increase in just 3 years, according to the Federal Trade Commission's annual Consumer Sentinel Network Data Book. A recent report by Kimberly Blanton -- The Rise of Financial Fraud: Scam Never Change but Disguises Do -- details a number of common "disguises" of tried-and-true scams. Her report is part of the Financial Security Project at Boston College's Center for Retirement Research. Disgusting.
Long-term care insurance prices are up
Shopping for a long-term care insurance policy? It's going to cost you more. According to the 2012 National Long-Term Care Insurance Price Index published by the American Association for Long-Term Care Insurance, prices for policies currently being offered are between 6 percent and 17 percent higher than comparable coverage a year ago.
The Association annually analyzes what consumers will pay for the most popular policies offered by 10 leading long term care insurance policies. The study found that the average cost for a 55-year-old single individual who qualified for preferred health discounts is $1,720 for between $165,000 and $200,000 of current coverage. In 2011, the same coverage would have cost an average of $1,480 annually.