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Fellow Americans: What’s the State of Your Finances?

Money advice following up on the President's speech


Part of the Election 2016: Stories to Read Before You Vote Special Report

After watching President Barack Obama’s State of the Union speech last night and his “four big questions that we as a country need to answer,” it seemed a good time to ask another, more personal question: What is the state of your personal finances in 2016?

I’ll tell you what some recent surveys and stats seem to answer. And I’ll recommend an excellent new online tool plus a fine, new (small!) book on personal finances that can help you see how you’re doing and take steps to do even better this year.

Don’t look for much help from Washington. Unlike his previous State of the Union speeches, Obama’s 2016 version was short on new proposals and even skimpier on specifics. That stands to reason. As he said: “Because it’s an election season, expectations for what we’ll achieve this year are low.”

Saving for Retirement ‘Has Gotten Tougher’

That’s not to say that middle-class Americans, especially those in their 50s and 60s, couldn’t use some help — particularly regarding retirement and employment. The median household income for households of those aged 55 to 64 is $60,580 and their median net worth is $165,900. What’s more, only about half of workers participate in workplace retirement plans.

Unlike many online calculators that require you to amass your financial data, this one just asks you to rate yourself in 10 areas.

As Obama said: “saving for retirement or bouncing back from job loss has gotten a lot tougher.”

The Pew Charitable Trusts’ survey of American Family Finances found that 60 percent of U.S. households experienced a “financial shock” in the past 12 months. “At all income levels, American households are one destabilizing shock away from financial hardship,” said Pew’s Clinton Key. “Forty percent know they should be better about their finances, but can’t make it happen. Insecurity is rampant.”

In his speech last night, the President called for strengthening Social Security, making employee benefits mobile and turning unemployment insurance into a job-retraining and wage-insurance program — but didn’t say how. (He also didn’t mention his administration’s proposed “fiduciary rule,” expected soon, requiring brokers and financial advisers to act in the best interest of retirement savers.)

So it’s best to assume that, when it comes to your finances in 2016, you’re on your own.

Overall, “people are 30 percent less anxious about finances than in 2012,” David Siegel, CEO of Investopedia, told me. He arrives at that number based on Investopedia’s “Anxiety Index,” drawn from fluctuations in his visitors’ readership of stories about certain financial terms. The index is now at 112; at the peak of the financial crisis in 2008 it was 145. Investopedia finds that retirement, however, is still a major concern.

Better Financial Shape Than 2 Years Ago

But you’re likely in better financial shape for retirement than two years ago, according to the new Fidelity Investment Retirement Savings Assessment study, which surveyed 4,650 working households earning at least $20,000. It found that the number of people on track to “live comfortably in retirement” jumped seven percentage points from 2013 — from 38 to 45 percent. (Of course, that means 55 percent of Americans aren’t on track.) Fidelity says America’s Retirement Preparedness Measure is 76, which it deems “fair.” For boomers, it’s 82 (or “good”).

“People are really getting the message that they need to take more control over retirement preparedness,” said John Sweeney, Fidelity’s executive vice president of retirement and investing strategies.

You can get your personalized Fidelity Retirement Score by answering six simple questions online.

How to Boost Your Retirement Preparedness

The best way boomers can boost their scores, Sweeney said, is to retire later. That lets you build more savings and, perhaps, delay claiming Social Security. Fidelity notes that your Social Security income will increase by 30 percent if you put off taking the money until Full Retirement Age (between 65 and 67, depending on when you were born). Pushing retirement from 65 to between 66 and 67, Fidelity says, increases the median Retirement Preparedness Score from 76 to 86.

Fidelity also encourages workers to save 15 percent of pay. I think that’s a nice goal but unrealistic for most people. Said Sweeney: “Boomers with children who’ve moved out can lower their real estate costs,” making it easier to save more.

Now to the new tool and book that I think you could find useful.

The CFPB Financial Well Being Tool

The first is the Consumer Financial Protection Bureau (CFPB) Financial Well Being Tool (the CFPB is a federal agency). Unlike many sophisticated, complicated online retirement calculators that require you to amass your financial data, this one just asks you to rate yourself and your financial situation in 10 areas (five if you prefer the short version). Then, you instantly get a “financial well-being score” that gives you a pretty good idea how you’re doing.

For instance, you check boxes saying how well you could handle a major unexpected expense, how concerned you are that the money you have or will save won’t last and how often you have money left over at the end of the month.

Interestingly, scores are tabulated differently for people 62 and older than for those who are 61 or younger. That’s because the agency believes financial lifestyles are much different for the oldest Americans than those under 62.

“I think this tool is a great idea,” said Prof. Dave Littell, director of the retirement income program at The American College of Financial Services. “We so often think about doing calculations with retirement software, but starting out with how you feel about money is probably a better place to go. This tool is incredibly simple and a good motivator.”

Littell and I both think it’ll be helpful to get your well-being score every January, during New Year’s resolution season. “January is a good time to assess how you’re doing financially and what you need to work on,” said Littell.

He thinks once you’ve done this, you can move on to more specific calculations to help you reach specific financial goals, like retiring at a certain age with a certain amount of money. “Less than 50 percent of the population ever uses software to see if they’re on track for retirement,” said Littell.

After that, he said, “learn something more about retirement income planning.” That means educating yourself about Social Security claiming strategies and benefits and looking into annuities that can pay you monthly income for the rest of your life.

Worth Reading: The Index Card

Speaking of educating yourself, that brings me to my money book recommendation: The Index Card: Why Personal Finance Doesn’t Have to Be Complicated by Slate’s Helaine Olen and Harold Pollack, a University of Chicago professor specializing in health and urban policy.

You may have seen the article on Next Avenue about how Pollack decided he could put all the financial advice you’ll ever need on one side of a 4 x 6 index card.

Now, Olen and Pollack have expanded that notion into a small, easy-to-read book. You may wonder why they needed 245 pages to explain what Pollack said he could fit on an index card. That’s a fair question.

The answer is: the rules are simple, but implementing them takes some explaining. And they do a fine job at it.

Interestingly, the book tweaks Pollack’s nine rules by adding three and dropping one — to expand them beyond saving, investing and debt. The new additions: Buy a Home When You’re Financially Ready; Insurance — Make Sure You’re Protected and a rule that’s not really a rule: Remember the Index Card. (The rule that disappeared was on the importance of understanding investment fees, but the authors wrapped that into their section on low-cost index funds.)

Their first rule, Strive to Save 10 to 20 Percent of Your Income, echoes Sweeney’s advice. I hope you can do it in 2016 and that you have a wonderful year, personally and financially.

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