Financial Recovery Strategies for Tough Times Barbara O’Neill Rutgers Cooperative Extension firstname.lastname@example.org
Workshop ObjectiveProvide practical financial planning strategies to helppeople deal with the financial aftermath of the GreatRecession and “broken promises” – Income losses and reductions – Benefit reductions and cost increases – Changes resulting from legislation (e.g., ACA)
How Many of You Were Personally Affected by the Great Recession?2013 Rutgers Study: 73% of Americans were touchedpersonally: http://news.rutgers.edu/medrel/news-releases/2013/february-2013/rutgers-heldrich-cen-20130207
New Normal AnalogyThe “New Normal” andTrump Plaza HotelPenthouse (Atlantic City, NJ)
What is the “New Normal”?• A constellation of economic events coming together – Projected to linger throughout much of the 2010s decade – Rebounds: 2017 for labor market? 2021 for housing market?• Different trends than those experienced previously• Puts a “framework” on recent events – People like to identify patterns to make sense of them• Some NN trends will have long-lasting impact (e.g., questions about employee benefit sustainability)
“New Normal” CharacteristicsAn extended period of:• Slow U.S. economic growth (GDP)• Low single-digit average annual stock returns• Stubbornly high unemployment levels• Precarious job security (public and private sector)• Struggling housing market• Tightened credit standards• Increased precautionary household savings and debt repayment• Constrained household spending
Baby Boomers and Older Gen XersEspecially Affected By the Financial Crisis• Fully experienced, not just one asset bubble- BUT TWO- during long stretches of their working lives – “Tech Bubble” and extraordinary run of double-digit stock market returns in late 1990s – “Housing Bubble” during much of the 2000s• Limited recovery time for battered investments• Money Magazine (April 2009): “A generation of Americans grew into middle age thinking that they had more wealth than they really did and their future was a lot more secure than it really was.”
Key Theme During Past Years Peggy Noonan reply to question from Maria Bartiromo about “game-changing events during 2011” on Wall Street Journal Report, 1/1/12 “The fall of structures that we’ve come to rely on” and “Lots of insecurity”
What’s Happening?Workers can’t even count on income andbenefits promised in their CURRENT laborcontract, not to mention promises madeyears ago when they were first hired.
Era of Broken Promises• Terminated pensions• “Church plan” pension exemptions from ERISA• Suspended 401(k) matches• Salary cuts and freezes• Furloughs• Benefit cuts• Pension COLA cuts• Others
The Real Cause of Anger While recent media reports have covered angry protests directed at public employees whose pension and health benefit packages lasted longer than most in the private sector……the REAL ISSUE is that workers inboth the public and private sectorhave lost critical pillars of financialplanning support that they oncethought they could count on!
Retirement Benefit Challenges• Increasing numbers of public (and private) sector job benefits have been overhauled – Employers realizing previously-promised benefits are unsustainable and/or unaffordable – Politically popular to slash public employee benefits• More than half of public pensions are <80% funded – < 80% level deemed “substantially underfunded”• Defined benefit (DB) pension formulas and COLAs especially under attack
Frequent Pension Changes• Lower benefit tiers for new hires• Retirement ages raised (e.g., 55 to 60, 62 to 65)• Automatic COLAs eliminated or scaled back• COLAs tied to pension plan performance• Changes in pension benefit formulas – Elimination of “sick day” bonuses – Change from “High 3” average salary formula to “High 5”
Case Example• “High Three” Average Formula – Years of Service/55 x Final Average Salary – 35/55 x $60,000 = $38,181 annual pension ($3,181/month)• “High Five” Average Formula – Years of Service/55 x Final Average Salary – 35/55 x $58,000 = $36,909 annual pension ($3,075/month)• Difference of $1,272/year and $106/month
Health Benefit Challenges• Workers’ coverage is decreasing and/or they are increasingly paying more for: – Premiums – Deductibles – Co-payments• From 2000 to 2010, average premiums for family coverage through an employer increased 114%• More employees’ ONLY option is high- deductible health insurance
What Do These Changes Mean?• Any income or benefit promise can be broken…even in union contracts• NO employee benefit is “guaranteed”• New economic realities require adjustment to avoid – Accumulating debt due to negative cash flow – Setting aside inadequate retirement savings – Outliving retirement assets• Proactive planning can mitigate benefit losses
What Should People Do WhenIncome and/or Benefits are Cut? • Work longer • Beware of stampedes • “Retire” while working • Accelerate debt repayment • Save the shortfall • Consider career changes and/or freelancing • Consider investing more aggressively • Spend less and shop savvy • Investigate new benefit alternatives • Keep an eye on government benefits
Work Longer• Time is an enemy (twice) for early retirees – Fewer working years to accumulate personal savings, pension benefits, and SS – More non-working years to finance• The years just prior to normal retirement age are usually a period of peak earnings• May have more control over “service” part of DB pension formula than “average earnings” – Example: tenured professor with a pay freeze
Beware of “Stampedes”• Employees heading for the door in droves fearing that an employer will cut benefits• Employers could cut benefits anyway (no guarantees that you’ll be “grandfathered”)• Examples: – NJ state workers, teachers, uniformed personnel – Federal government workers?• In many cases, longer service will mitigate benefit reductions (e.g., loss of COLAs) – Increases “Years of Service” part of DB pension formula
“Retire” While Working• Standard Strategy #1- Retire at a planned age with less money than anticipated due to NN events and risk running out of money due to benefit cutbacks, increased health care costs, longevity, etc.• Standard Strategy #2- Retire later and risk “waiting too long” (e.g., after age 65-70) so that death, health “issues,” widowhood, etc. hinder planned retirement lifestyle and/or quality of life.• New Strategy #3- Keep working BUT use money that had been going into savings (i.e., suspend or reduce 401(k) or 403(b) contributions) to begin enjoying “retirement activities” NOW without actually retiring. https://www2.troweprice.com/iws/wps/wcm/connect/d2edab0046d7abf0a87eb899d3 5c25cc/04779- 23_P1.pdf?MOD=AJPERES&CACHEID=d2edab0046d7abf0a87eb899d35c25cc (Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)
Save the Shortfall• Calculate amount lost from a retirement benefit cut• Multiply by 25 to determine shortfall savings goal• Do the math and develop an action plan to save – Younger workers need to save < older workers• Example: $6,000 annual benefit loss – Need to accumulate $150,000 by retirement ($6k x 25) – Age 45: $3,660/year or $305 per month
Consider Career Changes and/or Freelancing• Public sector employment benefits are generally not as attractive as they once were – Newer tier hires often have lower benefit tiers• Option #1: Changing jobs could lead to better benefits; less stress• Option #2: Aggressively demonstrate value to current employer (to earn a promotion)• Option #3: Freelance for additional income or to replace lost income due to benefit plan changes – Increased health insurance cost-sharing – Increased pension plan contributions
Consider Investing More Aggressively• Even with elimination of COLAs, people with DB pensions have income for life (acts like an annuity) – Ditto for Social Security• Most retirees with DC plans have risk of an ever- changing sum of money that needs to last a lifetime• May be able to invest more aggressively if you have streams of lifetime income• Know your risk tolerance: http://njaes.rutgers.edu/money/riskquiz/
Spend Less and Shop Savvy• Unpleasant as it is, some people may need to spend less to adjust to the effects of broken promises• Adjusting to less support from an employer or government may be a necessity, not an option – “Stepping down” spending – Moving to a smaller/cheaper home – Phone apps to compare prices – Coupons and groupons – Asking for discounts – Fewer trips and gifts (e.g., retirees) – Other ideas?
Investigate Benefit Alternatives• Explore benefit options that you might not have considered previously – High-deductible health insurance and an HSA or HRA• Do a cost-benefit analysis of alternatives – Premium savings from high-deductible plan vs. amount of out-of-pocket payment• Attend benefit fairs/seminars and ask questions
Keep an Eye on Government Benefits• Changes to Social Security – More needs-based? Older age? Lower benefits?• Changes to Medicare – More needs-based? Older age? Lower benefits?• New health care law and aftermath• Consider using very conservative benefit estimates for financial planning purposes• Assume that you can’t count on promised benefits?
Major Take-Away: Focus on What You CAN ControlCAN’T Control CAN Control• Speed of economic recovery • Healthy lifestyle• Financial markets • Spending habits• Labor market/unemployment • Saving habits rate • Investment expenses• Housing market • Human capital investments• Employee benefit cutbacks • How you spend your time• Political environment• Actions of lawmakers
Select What Works for You • Think of these strategies as a “Jersey diner menu” • Adopt strategies that work for you