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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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
‘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
Implicationsfor Practice
Financial Capability Model
Experience
Skills
Behavior
Knowledge
Program Personality
Attitude
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
Compared to What?
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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)
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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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Investigate your employer plan
http://money.cnn.com/calculator/pf/retirement-fees/
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
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Playing Retirement Lottery?
Why Play the Retirement Lottery?
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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/
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
Implicationsfor Practice
Table of Contents
1 Introduction
2 Youth
3 Young Adults
4 Working Families
5 Near Retirement
6 Out of Workforce
7 Implications for Practice
39 / 51
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
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Pathways2013
Introduction
Youth
Young Adults
WorkingFamilies
NearRetirement
Out ofWorkforce
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
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
Implicationsfor Practice
Learning More
J. Michael CollinsCenter for Financial Securityjmcollins @ wisc.edu608.616.0369
cfs.wisc.edussc.wisc.edu/~jmcollin/
Twitter: @jmcollinswisc
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