Download - NJBTEA New Normal Presentation-05-12
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Financial Education in 2012 and Beyond:
Preparing Students for a “New Normal”
Barbara O’Neill, Ph.D., CFP® Professor II and Extension Specialist in
Financial Resource Management Rutgers University
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Presentation Topics
• Description of financial capability
• “New Normal” financial realities
• 10 “New Normal” financial skills for students
• YOUR personal & professional “New Normal”
• Adjusting financially to “broken promises”
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Financial Educators Build Financial Capability
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What is Financial Capability? • New buzz word that is replacing “financial literacy”
• It is not just what you know but what you do with what you know (i.e., focuses on behavior)
– Financial literacy is the ability to understand personal finance concepts
– Financial capability refers to an individual's ability to make informed judgments and effective decisions about the use and management of their money
• President's Advisory Council on Financial Capability renamed in January 2010
• National Financial Capability Challenge
– http://www.challenge.treas.gov/
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FINRA Financial Capability Study (2009)
• Four key components
– Making Ends Meet
– Planning Ahead
– Managing Financial Products
– Financial Knowledge and Decision-Making
• Study Results:
http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p120535.pdf
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Key Survey Findings (N =1,488)
• 49% reported difficulty keeping up with monthly expenses (14% very difficult; 35% somewhat difficult)
• 23% reported occasionally overdrawing checking account
• 16% were late with a mortgage payment at least once in last two years
• Only 49% had an emergency fund of 3 months expenses
• 23% used high-cost “alternative” borrowing methods (e.g., payday loans and pawn shops)
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New Normal Analogy The “New
Normal” and the Trump Plaza Hotel (Atlantic City, NJ)
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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?
• 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)
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Don’t Get Too Comfortable, Though (Things Will Change….Again)
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Characteristics of the “New Normal” An extended period of:
• Slow U.S. economic growth
• 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
• Decreased household spending
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Why a New Normal?
We didn’t just have a perfect storm…
…We had a perfect TORNADO!!!
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Recent Financial Shocks • Recession/Shrinking economy (GDP) • Collapsed and merged investment banks • Bank failures and government takeovers • Increasing cost of basic necessities
• Mortgage defaults and high foreclosure rates
• Declining home values
• High unemployment rates
• Bear market/stock market volatility
• Increased poverty rates and rich-poor “wealth gaps”
• “The Paradox of Thrift”
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The “Paradox of Thrift” (Economic Term) What’s good for individuals (saving more and spending
less) is bad for the economy when everyone does it.
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Four Common Aftermaths of Financial Crises • Deep and prolonged asset market collapses
– Housing prices – Stock market indices
• Profound declines in output (deleveraging)
• High unemployment (in both public and private sector)
• Explosion in government debt as tax revenues decline
Reinhart & Rogoff (economists):
– The Aftermath of Financial Crises (NBER Paper) http://www.nber.org/papers/w14656
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Many People Have Lost Their “Penthouse”
• Unemployment
• Under-employment
• Involuntary “retirement”
• Wage freezes
• Furloughs
• Higher employee benefit payroll deductions (pay cut)
• Employee benefit cuts
• An eerie feeling that promised benefits are “unsustainable”
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For Some, the Dream of Upward Mobility Appears to be Slipping Away
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Many People Feel “Stuck” • Millennials can’t start careers
– “Idleness rate” for Americans <24 has increased steadily since 2007 (those neither in work or school)
– Lowest % of employed young people in 60 years! – Risk of a “lost generation” (Harvard labor economist Lawrence Katz)
• Boomers can’t end careers – Working longer than intended due to 401(k) and housing
value losses – Higher employment-to population rate than December 2006
for 55+ age group (37.6%) – ONLY age group to increase labor force participation during
the economic slowdown
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But, the Financial Recovery is 3 Years Old • End of the “Great Recession” declared in June 2009…but
it doesn’t feel like it
• Weaknesses: home prices, job recovery, slow GDP growth, disposable incomes, personal spending, household debt/deleveraging
• Strengths: U.S. exports (weaker dollar & emerging markets)
• Remember, “recovery” doesn’t necessarily mean that things are good; it just means that things are improving
– Economy growing (slowly) rather than shrinking
– Number of jobs rising (slowly) rather than falling
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What Needs to Change?
• Economists say it will take strong, sustained job growth to reignite household spending
• Recoveries are generally driven by housing and consumers
• Unfortunately, it often takes economies a long time to recover
• Reinhart & Rogoff study of past financial crises: it often takes at least a decade to recover
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“New Normal” Financial Skills
1.“The Basics” (e.g., planning, expense tracking, emergency funds, goal-setting with personal targets)
– Planning increases control and success, reduces stress
2. Entrepreneurship (more self-employed workers predicted; up to 40% of U.S. workers by 2020)
3. Budgeting for Variable Incomes (“cash flow calendar” with surplus and deficit months)
4. Health-Wealth Relationships (cost of poor health practices and health care decision-making)
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More “New Normal” Skills
5. Self-Funding Retirement Savings
– NN Reality: Less generous employer/government supports
6. Investment Savvy (understanding historical performance of stocks and real rate of return)
7. Understanding the Time Value of Money
– Students have 5-6 decades of compound interest
– Many people under-estimate its awesome power
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Still More “New Normal” Skills 8. Insurance Savvy
– New decisions (e.g., high-deductible health insurance, HSAs, new health care law provisions)
9. Student Debt ROI – Debt from Student Loans is Crippling a Generation – http://blog.nj.com/njv_guest_blog/2012/04/debt_from_student_loans_is_cri.html
10. Human Capital Investments – Increases resilience in tough times; education never ends
To read more about “New Normal” financial planning, see the article by O’Neill in the 2010 issue of the Journal of Consumer Education: http://www.cefe.illinois.edu/JCE/archives/
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Prudent Steps Everyone Can Take • Borrow less and pay off what you owe
• Build an emergency “war chest”
• Prepare a spending plan
• Become a penny-pincher
– Frugality is fashionable
– Coupons, groupons, employer discounts, consignment shops, simply asking for a price break where none is posted
• Invest in high quality companies
• Invest in yourself; try learn something new every day
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So Welcome to the “New Normal” New economic patterns
have been evolving in the wake of the financial crisis:
• Slow economic growth
• High unemployment
• Decreased employee benefits
• Flat or decreasing wages
• Lots of uncertainty on the horizon (e.g., taxes, inflation, Social Security, health care)
In times of crisis and uncertainty, knowledge is power!
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What is YOUR “New Normal,” Personally and Professionally?
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What is YOUR “New Normal,” Personally and Professionally?
Examples: Pay freeze, layoffs, job uncertainty, benefit cuts; less support staff; increased payroll deductions
Examples: Difficulty paying bills; more fights with spouse about money; home value down; low interest being earned on savings
Examples: Good family cooperation to reduce expenses; less “mindless” (impulse) spending; better bargains when shopping
Examples: Learned new job skills; unproductive people were terminated; Led a major team project
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Key Themes During Past Few 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”
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Workers can’t even count on income and benefits promised in their CURRENT labor contract, not to mention promises made years ago when they were first hired.
What’s Happening?
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Era of Broken Promises • Terminated pensions
• Suspended 401(k) matches
• Salary cuts and freezes
• Furloughs
• Benefit cuts
• Pension COLA cuts
• Other
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New York Governor Andrew Cuomo, 12/16/11 interview about streamlining government, including New York pension benefit tiers:
“the whole system was designed at a different time and a different place and it needs serious reorganization.”
Evidence of Broken Promises
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• Work longer
• “Retire” while working
• Accelerate debt repayment
• Consider career changes and/or freelancing
• Consider investing more aggressively
• Spend less and shop savvy
• Investigate new benefit alternatives
What to Do When Your Income/Benefits are Cut
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• 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/d2edab0046d7abf0a87eb899d35c25cc/04779-23_P1.pdf?MOD=AJPERES&CACHEID=d2edab0046d7abf0a87eb899d35c25cc (Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)
“Retire” While Working
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• 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 Career Changes and/or Freelancing
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• Explore benefit options that you might not
have considered previously – Example: High-deductible health insurance
• 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
Investigate New Benefit Alternatives
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• 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?
Keep an Eye on Government Benefits
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Major Take-Away: Focus on What You CAN Control
CAN’T Control • Speed of economic recovery
• Financial markets
• Labor market/unemployment rate
• Housing market
• Employee benefit cutbacks
• Political environment
• Actions of lawmakers
CAN Control • Healthy lifestyle
• Spending habits
• Saving habits
• Investment expenses
• Human capital investments
• How you spend your time
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37
How to Build Financial Capability?
• Realistic content (e.g., urban versus rural)
• Age-appropriate content
• Interactive and “hands on” learning
• Multiple methods and approaches
• Meaningful stories, role models, and activities
• Fun (e.g., games, skits, etc.)
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Questions and Comments?
Barbara O'Neill, Ph.D., CFP®, CRPC
Extension Specialist in Financial Resource Management and Professor II Rutgers University Phone: 732-932-9155 Extension 250
E-mail: [email protected]
Internet: http://njaes.rutgers.edu/money2000/
Twitter: http://twitter.com/moneytalk1