developing financial capability over the life...

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce

Implicationsfor Practice

Developing Financial Capability Over theLife Course

J. Michael Collins

University of Wisconsin-Madison

June 3, 2013

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Table of Contents

1 Introduction

2 Youth

3 Young Adults

4 Working Families

5 Near Retirement

6 Out of Workforce

7 Implications for Practice

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Financial Capability Over the Life Course

1 Defining Capability2 Stages of the Life

Course3 Recommendations

for Practice

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


‘Financial Capability’

Shifting financial decisionmaking to individuals

->Knowledge, Skills,Behaviors, Attitudes

->Life Course

->Financial Access

->Adaptability & Confidence

->Goal: Economic Well-being

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Financial Capability Model

Experience

Skills

Behavior

Knowledge

Program Personality

Attitude

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


FINRA Financial Capability Survey

www.usfinancialcapability.org - clickable map

55 percent living paycheck-to-paycheck

60 percent do not have a rainy day fund to cover threemonths of unanticipated financial emergencies.

On average 3/5 financial literacy questions correctly

...2012 Data Just Released...

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www.usfinancialcapability.org

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Re-Frame: Understanding Decisions inContext

Goal = financial security

Choices = tradeoffsSavings may not be goal; paying bills, debts, paying for‘needs’

e.g. Emergency savings = cash in pinch or spending on‘social mobility’

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Payday Loans

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Compared to What?

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Life Course ‘Stages’

1 Youth2 Young Adults3 Families4 Near Retirement5 Out of Workforce

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Table of Contents

1 Introduction

2 Youth

3 Young Adults

4 Working Families

5 Near Retirement

6 Out of Workforce


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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


School Age Children

Kids Themselves

Allowance (be consistent)Savings—in school and/or in homeBasic Concepts: opportunity cost/tradeoffs

Parents

Education Savings (529 plans as example)Family BudgetInclude in Decisions—observe you doing your‘homework’

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Rules of Thumb Ifor Youth (Parents/Teachers)

1 School-partnerships: financial institutions, communityorganizations

2 Family & financial discussions—need not be taboo, butnot easy

3 Focus on tradeoffs not hard and fast rules4 Investing in human capital as primary goal

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Table of Contents

1 Introduction

2 Youth

3 Young Adults

4 Working Families

5 Near Retirement

6 Out of Workforce


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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Post Secondary Schooling to Early 30s

School-work blend: Building earning power

Financial Services: Transitions to independence

Spending: Managing Short and longer term

Health Insurance: Being uninsured is risky financialchoice

Debt: Access to debt is good and important but mustbe well-managed

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


18 to 30 Year Olds: School to Work

Education & Student Loans

Returns to college are strongFederal/subsidized students loans are still a good dealWorking in school can slow you down

Getting Going

Credit Management Matters...even for datingThe Employee Benefits Maze

Health care: covered, but increasingly complexRetirement Savings: start early even if small

* Automate!

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18 to 30 Year Olds

http://www.brookings.edu/

http://www.brookings.edu/

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Student Loans: New Options

Know your options:Standard RepaymentGraduated RepaymentExtended RepaymentIncome-BasedRepayment (IBR)

Income-Contingent(ICR) (Direct)Income-SensitiveRepayment (FFEL)Alternative RepaymentPlans (Direct )

http://www.studentloanborrowerassistance.org/

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Check Your Credit

Check Your Credit Report Campaign

“5 minutes 3 times per year” 2/2, 6/6, 10/10

http://fyi.uwex.edu/creditreport/

• 15.9 out of 200+ million consumers use AnnualCreditReport.com annually (CFPB, 2012)

• 5% of records have errors that could have negative consequence (FTC, 2013)

- February 2nd (2/2): (Experian) - June 6th (6/6): (Equifax) - October 10th (10/10): (TransUnion)

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Rules of Thumb IIfor Young Adults

1 Invest in Yourself: consider costs of delay2 Manage student loans: consolidation, IBR, deferment3 Check Your Credit 3xs per year:http://fyi.uwex.edu/creditreport/

4 Retirement Funds—maximize employer matchesMake it automaticWatch for fees (on financial products of all types)

5 #1 risk? You cannot work. Need (term) life insurance &Disability

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http://fyi.uwex.edu/creditreport/

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Table of Contents

1 Introduction

2 Youth

3 Young Adults

4 Working Families

5 Near Retirement

6 Out of Workforce


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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


30-50 Year Old Families

Housing

Rent vs. OwnBuying a home for lifestyle not investment

Saving for Retirement

Keep it Simple

Beware: Sold not sought

There is no free lunch

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


A House is a Home

Historicallyownership is ameans forbuilding wealth1998-2006:expansion

Home equityused forconsumption

2008unemployment &home values fall

4 millionforeclosureslater...

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Focus on Fees

Focus on Fees

http://www.gao.gov/

http://www.gao.gov/

Investigate your employer plan

http://money.cnn.com/calculator/pf/retirement-fees/



Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Passive Investing: Hands Off is Better

Very unlikely to beat market consistentlyA few funds or investments will beat the average, butrarely will that happen every year

Number of Funds 5 years 10 years 20 years3 funds 17% 9% 3%5 funds1 14% 8% 2%10 funds 9% 6% 1%

Source: The Power of Passive Investing: More Wealth with Less Work by Richard A. Ferri, 2010

1average number of funds held by typical investor26 / 51

Playing Retirement Lottery?

Why Play the Retirement Lottery?

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Rules of Thumb IIIfor Working Families

1 Buy a home (not a real estate investment you happento live in)

2 Mortgages—shop around and refinance strategically3 401k funds (a)—focus on expense ratios and fees (not

returns)4 401k funds (b)—use simple, broad market index funds5 Save for kid’s college—it sends a signal6 Just say ‘no’ to financial sales people.

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Table of Contents

1 Introduction

2 Youth

3 Young Adults

4 Working Families

5 Near Retirement

6 Out of Workforce


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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Transitions and Planning

How long will you work? What does work mean?How healthy are you?What will your life be like in retirement?

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Claiming Social Security

Social Security Payments are a Form of Annuity

Inflation adjusted payments for lifeCore of retirement for many people

Most people claim as soon as possible...Don’t unless you have no other options

Social Security Survivor benefits also valuable forspouse

Use tools at: http://www.ssa.gov/

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http://www.ssa.gov/

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Understanding Claiming Options

http://crr.bc.edu/special-projects/books/the-social-security-claiming-guide/

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Social Security Claiming

http://squaredawayblog.bc.edu/

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Rules of Thumb IVfor Nearing Retirement

1 Boost savings rate as other expenses decline2 Manage health care costs & coverage3 Stay healthy, but prepare for not being healthy4 Give a lot of thought to Social Security claiming choices

(with spouse)5 Remember: work may continue. Retirement becoming

less of an ‘event.’

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Table of Contents

1 Introduction

2 Youth

3 Young Adults

4 Working Families

5 Near Retirement

6 Out of Workforce


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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Thinking Ahead

Retirement is not about money

Replacement rate fallacyYou may not need as much as you thinkHealth care is the wild card

Expectations, health & well-being are complex!Living too long is a real risk‘Costs’ of maintaining complicated investmentsSimplify, especially as we age

Keeping trusts, wills, estates ‘fresh’Preventing Financial Fraud & Elder Abuse

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Plan for Loss in Cognitive Functioning

Ability to make financial decisions?

30% of people in their 80s show cognitive impairment20% of people in 80s show evidence of dementia

That’s 50%. 50-50 chance you will lose cognitive acumen.

Agarwal, Driscoll, Gabaix, and Laibson. 2009. Brookings Papers on Economic Activity 2:51-117.http://dash.harvard.edu/handle/1/4554335

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http://dash.harvard.edu/handle/1/4554335

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Rules of Thumb Vfor Seniors

1 Organize documentsWillDPA: Durable Power of AttorneyLiving willHealth care proxy

2 Simplify & Consolidate3 Manage ‘Longevity Risk’

Annuity contracts: Yes, but read fine print4 Talk to your spouse and family about managing

finances regularly

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Table of Contents

1 Introduction

2 Youth

3 Young Adults

4 Working Families

5 Near Retirement

6 Out of Workforce


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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Keeping Up in Modern Consumer FinancialMarket

Accelerated use oftechnologyPrepaid debit cardsElectronic paymentsSmartPhone WalletInstant liquidity

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Financial Capability Strategies

Financial Capacity Building

Information

Models

Advice

Models

Mechanism

Models

• Disclosures

• Print/Web

• Interactive Web

• Workshops

• One:One

• Technical expert

(credentialed)

• Transactional

guide (may have

sales focus)

• Counseling

(acute problem

solving)

• Coaching

• Defaults

• Automatic

Deposit

• Product

constraints

• Reminders: Salience

• Monitoring

• Executive Attention

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Role of Education

Workshops, Seminars, Brochures, Websites etc.

Reduce the cost of acquiring informationIf people make better choices with more information

Evidence of effects of financial literacy education areweak at best2

But, be careful about ‘right’ outcomes

2http://ssc.wisc.edu/~jmcollin/JCA_published.pdf42 / 51

http://ssc.wisc.edu/~jmcollin/JCA_published.pdf

Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


More Information = More Debt Use

http://ssc.wisc.edu/~jmcollin/JEBO_12.pdf

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Multilevel Approaches

Community-basedorgsHelpingprofessionalsPartnerships withthe financialsector

Social Ecological Model

Social Ecological Model

PUBLIC POLICY

COMMUNITY

ORGANIZATIONAL

INTERPERSONAL

INDIVIDUAL

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Be Realistic: Financial Interventions HaveLimits

Limits of technicalsciences...

Exercise,

Monitoring, Nutrition, FoodAccess, Counseling

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Building Capability: When?

Teachable MomentsLife eventsTransitions

Not just a class; not just in schoolJust in Time

Decision making tools

Linking to financial product access

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


What About Behavioral Nudges?

DefaultsProcrastination/Impatience

InattentionReminders

Following the CrowdSocial comparisons

- Pro: Can be very powerful- Con: Indiscriminate

Still need to have theability to make decisions

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Emerging Strategies

Peers, Couples, GenerationalFocus on GoalsTranslating into impacts on ‘future self’Leverage Peers (and peer networks)

Examples:

Financial CoachingEmergency Savings

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Focus on Well-Being

More than Finances

Being a steward of all resourcesStability—especially in housingBeing able to response to shocksMental and physical healthAdaptability as contexts change

StressConfidenceTrust

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Moving Forward

Rules of thumb help......but one size fits all solutions may not fit everyone

Context mattersA lot still to learn!

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Pathways2013

Introduction

Youth

Young Adults

WorkingFamilies

NearRetirement

Out ofWorkforce


Learning More

J. Michael CollinsCenter for Financial Securityjmcollins @ wisc.edu608.616.0369

cfs.wisc.edussc.wisc.edu/~jmcollin/

Twitter: @jmcollinswisc

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cfs.wisc.edu

ssc.wisc.edu/~jmcollin/

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