Barbara O'Neill, Ph.D., CFP®, AFC, CHC, is a Distinguished Professor at Rutgers University and Rutgers Cooperative Extension's Specialist in Financial Resource Management. She provides national leadership for the Extension Investing For Your Future and Small Steps to Health and Wealth™ programs and has written over 160 articles for academic publication and received over 35 national awards and more than $1 million in grants to support financial education programs and research. She also serves as the Academic Editor of the Journal of Financial Planning. She tweets personal finance information using the handle @moneytalk1. Contact her here.
For the past three years during December, I’ve presented a 90-minute webinar for financial educators and counselors that reviews key personal finance news stories that took place during the previous calendar year. It is believed to be the only comprehensive annual review of personal finance research, events, legislation, trends, and educational resources in existence. As such, the webinars are an eclectic collection of facts and figures on a wide variety of personal finance related topics.
This article presents a 2016 Personal Finance Year in Review webinar summary with embedded source links provided for additional information. If a link leads to a “paywall” that requires a subscription or payment, source material may be able to be accessed at no cost by searching online using an article’s title and author. Information is grouped according to its placement in various webinar segments beginning with empirical research findings and concluding with a preview of 2017 annual limits related to financial planning.
Retirement planning was a topic of high interest. Wu et al. studied retirement age and life expectancy and found that retiring after age 65 may help people live longer. The risk of dying from any cause was 11 percent lower for a one-year delay from age 65 to 66. Pfau studied home equity as a retirement income strategy and found that opening a reverse mortgage line of credit at the start of retirement and delaying its use until a portfolio is depleted creates the most downside protection. Isrealsen studied retirement portfolio sustainability and estimated various withdrawal scenarios; e.g., retirees with portfolio balances equal to 12 times their final working salary can replace 60 percent of their wages with a 5 percent withdrawal rate.
Klinger studied retirement portfoliofailures (i.e., running out of money) and found the withdrawal rate ratio to be a good indicator of future portfolio failure and that applying a “guardrail” (e.g., reduced withdrawals at specific portfolio benchmarks) can help ensure a financially successful retirement. Inglis studied the “feel free” retirement spending strategy where people have little worry about depleting their savings: a person’s age divided by 20 (for couples, use the younger spouse’s age); e.g., 3.5 percent of savings at age 70.
Personal traits that impact financial behaviors were also studied. A study of Dutch households found that savers shared the following traits: economic hardship early in life, financial savings behavior in youth, interest in financial news, a sense of control, and optimism regarding the economy. Newcomb studied impulsiveness and saving and found that high levels of impulsiveness and materialism were associated with poor financial decision-making, and the strongest predictor of good financial decisions was not financial literacy but focus on the future. In another study, O’Neill et al. found a positive relationship between planning behavior and health and financial practices and between health and financial practices.
The TIAA Institute compared systematic withdrawals from retirement savings vs. annuitizing. Their conclusion was that a combination of a variable annuity and income withdrawals from investments provided the best mixture of income generation and ending wealth. The EBRI 2016 Retirement Confidence Survey found that 48 percent of workers (or their spouses) had calculated their retirement savings need. Additionally, 54 percent of workers had less than $25,000 saved for retirement, excluding the value of their home and a defined benefit pension), including 26 percent who have less than $1,000 in savings.
An AICPA study found that impulse spending and pessimism are major barriers to saving among Millennials, and the 2016 America Saves Week survey found that 49 percent of respondents saved at least 5 percent of their income. Those with a savings plan with specific goals saved more successfully than those without a plan.
A number of studies described the financial fragility of U.S. households. An Associated Press poll found that 75 percent of people in households making less than $50,000 a year, and 38 percent of those making more than $100,000 would have difficulty coming up with $1,000 to cover an unexpected bill. A New America study found that full-time child care in a center for a child age 4 or under costs more than average in-state college tuition. One-fifth of families use a “patchwork” approach to reduce the high cost of caring for children. The 2015 FINRA Investor Education Foundation National Financial Capability Study, released in July 2016, found that 34 percent of 27,564 respondents “probably or certainly” could not come up with $2,000 for unexpected needs and half did not have an emergency fund of three months’ expenses. A study of the aftermath of identity theft by the Identity Theft Resource Center found that 150 million Social Security numbers were exposed in breaches in 2015. Nearly half of income tax fraud victims were forced to borrow money or apply for government assistance when they did not receive timely refunds.
A 2016 Bureau of Labor Statistics study found that spending patterns do not change significantly in many categories (e.g., clothing, transportation, and entertainment) until age 75. Average annual health expenditures per person, however, increased as follows: $4,958 for ages 55–64, $5,956 for age 65–74, and $5,708 for ages 75 and older. Housing was the greatest expense in average dollar amount and as a share of the household budget for older households.
An analysis of data about credit card debt from the U.S. Census and Federal Reserve found that 38.1 percent of all households carry some sort of credit card debt. The average debt for all households, with and without revolving balances, was $5,700 and the average for balance-carrying households was $16,048. A Federal Reserve of New York study of baby boomer debt found unprecedented debt loads for older Americans. The average 65-year-old borrower has 47 percent more mortgage debt and 29 percent more auto debt than 65 year olds in 2003.
Household wealth was a frequent topic of 2016 government reports. The Census Bureau reported the first gain in household income since 2007 and the largest annual gain since they began releasing data in 1967. Median household income in 2015 was $56,516 and the official poverty rate was 13.5 percent. The Federal Reserve reported a collective record of $89.1 trillion net worth for U.S. households, driven by a strong stock market, rising home values, and increased bank deposits; however more than three million households remain underwater on their mortgages. An Associated Press article reported that many Americans are untouched by the economic recovery and that the middle class has been “hollowed out.” Income and assets of the upper 10 percent households are skewing the data used to measure economic health.
The wide disparity in American household incomes can be seen to two 2016 studies. A widely cited Federal Reserve study found that 46 percent of adults said they could not cover an emergency expense costing $400 or would cover it by selling something or borrowing something. Additionally, 31 percent of non-retired respondents had no retirement savings or pension. On the other hand, the upper middle class is larger and richer than ever. According to research by the Urban Institute, households with earnings between $100,000 and $350,000 comprised 29.4 percent of the U.S. population in 2014, up from 12.9 percent in 1979.
Key Financial Events and Trends
In 2016, for the first time ever, according to a Kaiser/HRET survey, more than half of workers (51 percent) have a deductible of more than $1,000 for a health care plan covering a single person (versus 46 percent in 2015). In 2017, 84 percent of large employers will offer high-deductible plans and 35 percent will offer only high-deductible plans. More employers are pulling back on workplace wellness benefits such as onsite flu shots, 24-hour nurse hotlines, health coaching, and insurance premium discounts according to the Society for Human Resource Management. Reasons include increased costs and difficulty measuring a return on investment. The number of Americans lacking health insurance was at an historic low: 8.8 percent of CDC survey respondents in 2016, versus 16 percent in 2010, with 15.9 percent of 25 to 34 year olds uninsured versus 8.1 percent of 45 to 64 year olds.
The Affordable Care Act (ACA) continued to make news in 2016. Concern mounted about low enrollment among young adults under age 35 who are needed to offset the costs of older, sicker people. In 2016, less than 30 percent of the nearly 13 million people who obtained coverage on the ACA exchanges were age 18–34. Another big concern was shrinking plan choices, as many insurers withdrew from the health insurance marketplace, and sharp premium increases by remaining insurers. The shared responsibility payment (i.e., the IRS term for the fee paid by those who lack health insurance) increased to the greater of a flat assessment of $695 per adult and $347.50 per child, with a maximum of $2,085 per household, or 2.5 percent of household income, up to the national average cost of a Marketplace Bronze plan.
A 2016 report by the American Association for Long-Term Care Insurance noted that Americans bought 105,000 long-term care policies in 2015 vs. 750,000 in 2000. Reasons given include rising costs for new products and rate increases on existing policies. A year of skilled nursing home care costs about $91,000. The oldest baby boomers turned 70 in 2016, with 2.5 million baby boomers (of 3.4 million born in 1946) hitting this milestone. They can expect 15 more years of life but never before have so many 70 year olds owed money on their house. The oldest boomers’ first required minimum distribution (RMD) must be made in 2016 or 2017 and many are expected to work longer than previous generations. Since 2007, the share of older working women age 65+ has grown (1 in 7 women today vs. 1 in 12 in 1992), while the percentage of every other category of U.S. worker—by age and gender—has declined or remained flat.
In 2016, bank ATM and overdraft fees were reported to top $6 billion. A 2014 CFPB study found that the typical overdraft fee is $34 and a majority of overdrafts are made on transactions of $24 or less. If someone borrowed $24 for three days and paid a $34 fee, the annual percentage rate (APR) is 17,000 percent. The Wells Fargo bank scandal exposed a culture of unrealistically high sales targets and the creation of fake bank and credit card accounts. Transfers to fake accounts often triggered overdraft fees when original account balances ran low. Another item of banking news was that the Automated Clearinghouse Network (ACH) made strides toward real-time money movements. Businesses can now hold onto cash until the day that their workers get paid instead of a few days before due to previous one- or two-day delays.
Reports were issued in 2016 about various population groups. In a widely publicized public policy monograph, America’s Invisible Crisis: Men Without Work, Eberstadt reported that a smaller percentage of American men age 25–54 were currently working than near the end of the Great Depression. They are getting by on government benefits and/or the support of others. The Pew Research Center announced in 2016 that, for the first time in modern history, living with parents edged out all other living arrangements for 18–34 year olds. Just under a third (32.1 percent) of millennials live at home, which impacts their parents’ spending, retirement savings plan contributions, home down-sizing plans, and other financial decisions. The share of borrowers defaulting on student loans fell modestly to just over 11 percent of the 5.2 million students who left school during fiscal year 2013. Factors believed to be responsible include an improved labor market and increased use of income-driven repayment plans that reduce payments.
Availability of free FICO credit scores continued to increase in 2016. Most big banks now provide credit score access to their customers and an estimated 100 million Americans can obtain free credit scores via financial institutions who provide them to recruit and retain customers. Income tax fraud news was mixed. On the positive side, there was a unprecedented public- and private-sector crackdown on tax refund identity theft as tax preparation firms and the IRS shared information and prevented millions of dollars in fraudulent refunds. Tax identity theft dropped 50 percent during the first nine months of the year. However, there was an uptick in fake emails and calls purporting to come from the IRS. Some fraudsters asked victims to pay a balance tied to the ACA or asked for payment with a prepaid debit card. 2016 also saw an increase in predatory installment loans in the wake of a crackdown on payday loans by the Consumer Financial Protection Bureau (CFPB). Like payday loans, high-cost installment loans often carry triple-digit APRs, but they are repaid over a longer period of time (e.g., six to 12 months).
The first index fund, Vanguard 500 Index Fund, turned 40 years old in 2016. Founded in 1976 with $11.3 million in assets, it now has more than $3 trillion in passively managed investments and more than 20 million investors. Another unique 2016 metric, reported by the U.S. Census Bureau, was that the percentage of U.S. households that owns homes matched its lowest level since tracking began in 1965. Just 62.9 percent of households owned a home, down from a peak of 69.2 percent in 2004. Reasons cited for this change include rising property prices, high rents, stagnant pay, and student loan debt. Reverse mortgages were also in the news in the wake of 2013 rule changes (e.g., tighter borrowing limits and protections for non-borrowing spouses) and the publication of research showing that reverse mortgages can extend the life of retirement savings, help people rebuild portfolios after market downturns, and delay the payment of Social Security benefits until age 70 to earn a higher benefit. In short, reverse mortgages are no longer viewed as just a “last resort.”
Government Legislation and Policy Changes
In 2016, the IRS clarified acceptable reasons for waivers of the 60-day rollover deadline for retirement savings plan transfers to avoid a 10 percent penalty and ordinary income tax. Reasons include financial institution and postal errors, misplaced distribution checks never received by a taxpayer, severe damage to a principal residence, death or serious illness in a taxpayer’s family, and incarceration of a taxpayer. A key policy change was the Department of Labor’s Conflict of Interest Final Rule (the fiduciary rule) that takes effect in April 2017. It requires financial advisers who provide guidance on retirement plan assets to make recommendations that are in the best interests of their clients. In addition, compensation paid to advisers must be “reasonable.” Consumers and financial advisers can expect future adjustments in retirement services market procedures.
Changes to Social Security benefit claiming strategies took effect in 2016 following passage of the Bipartisan Budget Act of 2015. There are now three separate sets of rules that apply, depending upon when individuals were born. Beginning in May 2016, married couples are no longer able to file for—and then suspend—benefits for the purpose of making their spouse eligible to take spousal benefits. Those born in 1953 or earlier, however, can file a restricted application for spousal benefits at full retirement age. In a restricted application, someone files for one type of benefit, usually a spousal benefit, and later switches to his or her own higher retirement benefit that includes delayed retirement credits. Beneficiaries still have a one-time right to withdraw their application for benefits within 12 months after benefits begin.
Rules were changed in 2016 for the process of applying for federal student aid. The Free Application for Federal Student Aid (FAFSA) form can now be filed as early as October 1 of a high school student’s senior year instead of January of the following calendar year. This is known as “prior-prior year” (PPY) income data. Instead of estimating data from 2016 tax returns that are not yet filed, families can use 2015 tax returns to report actual income and assets. Financial aid offers are expected to be received earlier as the application process gets backed up by three months. Capital gains should be realized before January 1 of a student’s sophomore year in high school to avoid having the money count as income on the FAFSA.
Policy Changes Affecting Military Families
Policy changes that took effect in 2016 include establishment of final regulations for the Military Lending Act (MLA) and establishment of the Blended Retirement System (BRS). Rule changes extended MLA protections, including the 36 percent military annual percentage rate (MAPR) cap, to a wider range of credit products, including credit cards. The final rule also prohibits rollovers, renewals or refinances of payday loan transactions or other deferred presentment transactions by creditors other than banks, thrifts, or credit unions. Creditors are subject to civil liability and administrative enforcement for MLA violations.
The BRS was authorized under the FY 2016 National Defense Authorization Act. It combines three components: (1) a scaled back traditional legacy retirement pension (versus the current military retirement system); (2) a defined contribution to a service member’s Thrift Savings Plan (TSP) account; and (3) continuation pay at a mid-career point in exchange for additional service, as shown in this infographic. The BRS is considered a positive change for a large majority (more than 80 percent) of service members who currently leave military service without any retirement benefit. Those who are disciplined TSP savers will benefit from DoD matched saving formulas. The BRS opt-in period is calendar year 2018. Service members who joined before January 2006 will be grandfathered and remain in the current military retirement system.
Financial Education Resources
A useful resource that gets updated annually is the College for Financial Planning’s publication Annual Limits Relating to Financial Planning. In a two-page document, indexed numbers for income and estate taxes, retirement savings plans, health savings accounts, marginal tax brackets, Medicare premiums, Social Security rules, and more are listed. For financial advisers who conduct educational programs in schools, Next Gen Personal Finance added new products in 2016, including data crunch activities, questions of the day, a new lesson about credit, an interactive library, and weekly podcasts.
The National Endowment for Financial Education (NEFE) expanded its Smart About Money program with the addition of eight courses on topics that include credit/debt, insurance, investing, and housing. Worksheets and common money questions were also added and the site is now mobile responsive and can be viewed on smart phones and tablets. NEFE also revised its Evaluation Toolkit Manual, to help financial educators understand program evaluation goals and procedures, and added new content, including a Budget Wizard tool, to CashCourse, its website for college students. A brand new NEFE product in 2016 is its white paper on financial education program evaluation research and procedures.
The Consumer Financial Protection Bureau (CFPB) added new content to its financial education resources webpage in 2016 and the Jump$tart Coalition updated its Making the Case for Financial Literacy document. eXtension published a series of 10 fact sheets about student loans and Rutgers Cooperative Extension published six new personal finance lesson plans for high school financial educators to add to the five that were completed in 2015. The 2016 Road to Financial Wellness financial education road trip by @Phroogal lasted 107 days, including a pre-event seminar at Rutgers University that was videotaped and archived.
Looking Ahead to 2017
Modest changes were announced for the Social Security earnings limit, which will increase from $15,720 in 2016 to $16,920 in 2017. The amount of earnings required to earn a quarter of coverage will increase from $1,260 to $1,300 and the maximum Social Security benefit will increase from $2,639 to $2,687. Maximum taxable earnings subject to Social Security tax will be $127,200 in 2017, up from $118,500 in 2016. The cost-of-living adjustment for Social Security benefits in 2017 is 0.3 percent.
Modest changes were also announced for tax-deferred savings plans. The contribution limit for self-only health savings accounts will increase by $50 in 2017 to $3,400. Family plan contributions ($6,750) and catch-up contributions ($1,000) will remain the same, as will the required amount for high deductible health plan (HDHP) deductibles: $1,300 for self-only coverage and $2,600 for a family. Contribution limits for tax-deferred retirement savings plan contribution limits will also remain unchanged with a maximum $18,000 contribution limit and an additional $6,000 maximum catch-up contribution.
Changes in income tax limits for 2017 will be modest. There will be the typical annual increases in marginal tax bracket income ranges, income phase-outs for IRA savers, and AGI limits for the saver’s credit and earned income tax credit. The overall defined contribution plan limit will also increase by $1,000 from $53,000 in 2016 to $54,000 in 2017. The standard deduction will increase slightly in 2017 to $6,350 for singles and $12,700 for married couples filing jointly and the estate tax exclusion amount will rise to $5.49 million from $5.45 million in 2016.
In addition to a hotly contested presidential election, 2016 saw changes and challenges on many financial fronts. Some key takeaways are that many Americans are financially “fragile” and unprepared for retirement, high deductible health insurance is becoming the norm, fewer men age 25 to 54 and increased numbers of older women are employed, and household income, net worth, and health insurance coverage have increased in recent years. In addition, Affordable Care Act penalties have increased from previous levels, the oldest baby boomers turned 70 and must start taking required minimum distributions, more young adults live with their parents than in any other living arrangement, free FICO credit scores are widely available from financial institutions, and the U.S. homeownership rate is at a half-century low. Predatory installment loan use has increased, reverse mortgages are now viewed as a financial planning tool, and major regulatory changes were made to retirement planning adviser rules and Social Security claiming strategies. Military families have new rules affecting their use of credit and retirement benefits.
An understanding of empirical research results and current financial events and trends can help inform financial planning practice. Applying this knowledge to specific financial situations and challenges can help advisers serve their clients.