Category Archives: personal finance

How Much Do You Need to Save for Retirement?

How much do you need to save for retirement to maintain your pre-retirement lifestyle?

It's an easier question to ask than to answer because there are a multitude of factors that can affect what the right answer to the question will be for you. And that assumes that whatever answer you come up with turns out to be the right answer!

Still that doesn't stop people from asking and firms offering their retirement planning services from attempting to answer in the simplest ways they can.

The latest firm to do so is Fidelity, where they've developed the concept of using age-based savings factors to help you determine if you've saved enough at various points of your life. For the simplest estimate, all you need to get started is find the appropriate savings factor that applies for your age, multiply it by your annual income, then see how the balance of your retirement savings account compares to it. The following chart is one that they have provided for that simple math.

Fidelity: Savings Factors To Help You On Your Journey to Retirement

Seems pretty simple, right? And to be fair, the math involved is pretty simple. In the following chart, we've started with the median income earned by a typical American between the ages of 25 and 29 in 2016, then showed the inflation-adjusted savings that such an individual would have to accumulated at different points throughout their life to meet Fidelity's savings targets. The income trajectory shown for the individual is also one that Fidelity assumes, which we've listed along with a number of additional assumptions Fidelity is making....

Estimated Savings Needed to Maintain Your Pre-Retirement Lifestyle (According to Fidelity)

Will all those assumptions apply to you? Maybe yes, maybe no. Just for fun, we decided to play with just one of those assumptions, where instead of Fidelity's assumed 1.5% annual inflation-adjusted raise, we wondered how differently the chart would look if the individual to whom it applied was simply earning 2016's median income for the indicated age. After all, since it is the median, 50% of Americans have annual incomes above that level and 50% of Americans have annual incomes below it, so that particular income trajectory might be considered to be more representative of what a typical lifetime income trajectory for an American randomly plucked from the population at large might have, so here that chart is.

Estimated Savings Needed to Maintain Your Pre-Retirement Lifestyle (According to Fidelity) for a Median Income Earning American

It's quite a lot different from Fidelity's assumed lifetime of annual faster-than-the-rate-of-inflation raises. So the real question is which chart better represents the kind of pre-retirement lifestyle that an American looking to retire would want or be able to maintain?

We'll leave other questions that might come up about Fidelity's assumptions, such as "can someone with this income really afford to set aside 15% of their annual income for their retirement at Age 67?", as an exercise for our readers!

What’s in the Shopping Carts of Food Stamp Recipients?

Last November, the USDA published a report that provides some insight into the kinds of food and drink items that recipients of its Supplemental Nutrition Assistance Program (SNAP), which used to be called "Food Stamps", are buying up with their government-issued EBT cards.

In the chart below, we've taken the Top 10 items from Exhibit 6 of the report, which lists the millions of dollars of eligible food and drink commodities that SNAP recipients were determined to have bought in transactions using their EBT cards, and shown how the spending for those items compares to the total amount of spending that was counted in the study.

The Value of What's in the Shopping Carts of SNAP Benefit Recipients, 2016

Together, SNAP benefit recipients purchases of the Top 10 food and drink categories accounted for over one-quarter of all the spending on eligible food and drink items captured in the report. The most popular category, soft drinks, alone accounted for over 5.4% of all purchases, or about $1 of every $18.38 spent.

It's important to recognize that SNAP recipients will often use a combination of their regular income and their SNAP benefits to purchase groceries. For example, a single individual in New York City who has $825 in income per month can augment that income with a monthly SNAP benefit of $194 per month (a lower amount of SNAP benefits can be obtained for such single, childless, working-age individuals with incomes of as much as $1,285 per month).

Since these benefits are exempt from federal, state and local income taxes, and are also exempt from state and local sales taxes, SNAP recipients can maximize their benefits by using them to buy items that would otherwise be subject to state and local sales taxes. For example, in New York once again, items like carbonated soft drinks, candy and grocer-prepared food like sandwiches, are subject to the state's sales tax rate of 4%, where the city of New York would pile on an additional local sales tax rate of 4.49%, which makes it possible for SNAP benefit recipients to buy 8.49% more of these kinds of groceries in New York City with their benefits than they can with their regular income.

And for that matter, that much more than what people who don't receive SNAP benefits can buy with the same amount of cash, although the amount of this kind of extra tax-free benefit will vary by state, city and county!

Data Source

Garasky, Steven, Kassim Mbwana, Andres Romualdo, Alex Tenaglio and Manan Roy. Foods Typically Purchased by SNAP Households. Prepared by IMPAQ International, LLC for USDA, Food and Nutrition Service, November 2016. [PDF Document].

U.S. Student Loan Implosion

The Consumer Federation of America recently put out a press release that reports that they've found that 1.1 million student loan borrowers in the United States have gone 270 or more days without making payments on their Federal Direct Student Loans, with more than $137 billion worth of the loans issued by the U.S. government now qualifying as being in default by that standard.

Update 27 April 2017: The figure of 1.1 million defaults only applies to the number of student loans that went into default during 2016. Altogether, through December 2016, there were a total of 4.2 million student loans in default, the combined balance of which adds up to $137 billion. We're afraid that the CFA missed noting that total figure in their press release, and we've updated our charts and analysis accordingly to reflect the corrected total of for the number of Federal Direct Student Loans in default.

Data from the CFA's press release has made the rounds among multiple news outlets, but we have a pretty basic question: Are those big numbers?

They certainly seem like big numbers, what with all the millions and billions being thrown about, but how do these numbers fit into the bigger U.S. government-issued student loan story?

We decided to dig down into the press release's details to find out. Let's start with the biggest numbers, where we discover that $137 billion worth of Federal Direct Student Loans are in default, against the larger total of $1.3 trillion worth of Federal Direct Student Loans that have been issued through the end of December 2016.

Federal Direct Student Loans, Amounts in Default and Not in Default as of December 2016

Here, we calculate that the percentage of student loans that have gone 270 or more days without having had a payment made upon them represents about 11% of the total amount borrowed. That means that some 4.2 million people whose student loans require that they make some sort of scheduled payment went more than 9 months without making any.

To tell if that's a big number or not requires that we put that number into some kind of context. Here, we'll draw on the U.S. Federal Reserve's data for the delinquency rates on loans and leases issued by all commercial banks in the U.S., where for the fourth quarter of 2016, we find that the total delinquency rate is 2.04%. That value had previously peaked at 7.4% back in the first quarter of 2010, following the bottoming of the Great Recession.

But another important thing to consider is that delinquency rate would include all private-sector issued loans and leases that have payments that are past due, including those that have gone without payment for much less than 270 days. That figure tells us that the default rate of 11% for Federal Direct Student Loans is, to put it in Trumpian terms, "Yuge!"

Going by the standard of simple delinquency, the WSJ reported back in April 2016 that 40% of student loan borrowers were delinquent on their scheduled student loan payments, meaning that they were at least 15 to 31 days behind.

The next question that we'll tackle is whether the 4.2 million student loan borrowers who have defaulted on making payments on their Federal Direct Student Loans is a lot. The following chart shows how they fit into the total number of 42.4 million Americans who have taken out Federal Direct Student Loans.

Federal Direct Student Loan Borrowers, Number In Default and Not in Default as of December 2016

Click here to see the previous version of this chart, which only broke out the 2016 defaulters.

Here, we discover that the 4.2 million Americans that have defaulted on their Federal Direct Student Loans is about 10% of the total number of Americans who have borrowed money from the U.S. government to pay for a university or college education in the United States, and that the 1.1 million defaults in 2016 represent 3% of the total.

What we find here is that a relatively small portion of the total population of federal student loan borrowers is responsible for the very high default rate for the Federal Direct Student Loan program. 38.2 million, or 90% of student loan borrowers, have not gone 270 days or longer without making their scheduled student loan payments to Uncle Sam's hired student loan servicers.

The combination of low number of defaulters and relatively large amount of defaulted student loans tells us that these individuals have truly racked up what might be considered to be gargantuan hefty student loan debt. Let's next find out how much debt that is.

Average Federal Direct Student Loan Balance, Number In Default and Not in Default as of December 2016

Click here to see the previous version of this chart, which divided the full $137 billion of defaulted student loans among 2016's defaulters.

The average student loan balance in the U.S. is $30,650. For Americans who haven't defaulted on their student loans, that average figure drops to $30,434. But for Americans who have defaulted on their payments to their U.S. government creditor, the average balance on their Federal Direct Student Loan is $32,714.

To put that latter number into context, consumer personal finance site Nerdwallet reports that the average amounts of debt for the U.S. households that report having the indicated kind of debt for 2016:

  • Credit cards: $16,748
  • Mortgages: $176,222
  • Auto loans: $28,948
  • Student loans: $49,905
  • Any type of debt: $134,643

The average amount of a Federal Direct Student Loan in default for a single American is nearly double the amount of credit card debt for the combined accounts of Americans living in a single household. It also exceeds the average amount of the combined auto loans held by American households.

But maybe the most scary aspect of the average balance of a defaulted Federal Direct Student Loan is that only $2,280 separates that loan gone bad from the average balance of a student loan that is not in default.

Because the U.S. Department of Education, which administers the Federal Direct Student Loan program, borrows money through the U.S. Treasury to issue these student loans, it must charge all borrowers a higher rate of interest to make up the $137 billion gap in its direct student loan program that is caused by a small minority of borrowers, or else U.S. tax revenue must either be diverted or additional money borrowed to make up the difference in paying back the U.S. government's creditors.

The U.S. student loan implosion therefore has a very real cost to both U.S. taxpayers and to Americans seeking to borrow money from the U.S. government to pay for their higher education.

Political Calculations, Mathematics Education and Obamacare

Mark Bertolini is the CEO of Aetna (NYSE: AET). Yesterday, he gave an extended interview with the WSJ's Dennis Berman on the topic of the future of health care, in which he made big news by describing the Affordable Care Act (ACA), which is more popularly known as Obamacare, by saying that "it is in a death spiral."

But the part of his comments that really stood out to us came just after the 14-minute mark of the interview, where he said:

You know that mathematics education in the United States is working when someone says, let's see, I'm going to pay this much premium, I've got a $6,000 deductible, the average deductible across the country is $3,600 dollars, it's up 15% this year alone, right, and when I go to the doctor I'm going to pay cash, nobody anticipates spending a day in the hospital or going to the doctor more than once... so premium, plus deductible, plus paying cash... why do I do this? I'll just pay the penalty and move on.

We here at Political Calculations have been happy to help provide Americans with that particular mathematics education since 17 September 2013, when we introduced our tool "ObamaCare: Should You Pay the Premium or the Tax?" (a 2017 version is also available), in which we made the kind of personal finance math described by Bertolini easy to do for any American with an Internet connection.

So, in a way of speaking, we're the solution to the game of Clue featuring the all-but-confirmed death of Obamacare: it was Political Calculations, on the Internet, with Math!

That said, we do have some thoughts on how to address the situation that Bertolini describes as the result of the adverse selection that has drawn in the sickest Americans eligible for Obamacare while driving out the healthiest Americans. In our view, that outcome will be exceptionally valuable in making good on the failed promise of Obamacare to provide people with pre-existing conditions with the ability to obtain affordable health insurance coverage. Unlike the other failed Obamacare promise that "if you like your health care plan, you can keep it", we think it may be possible to make that kind of health insurance portability a reality, so long as it can be separated from the all the other, excessively wasteful baggage of the Affordable Care Act.

If you want a teaser, we think that the solution to that issue is not subsidized health insurance, but rather reinsurance, which is an idea that we'll explore more at a later date.

In the meantime, if you'd like to see what else Aetna's CEO had to say on about the future of health care, here's the WSJ's full video of the 50-minute interview, but we'll warn you in advance that it starts off with over four and a half minutes of some especially awful background music before it gets going.

Is Obamacare Really Affordable for the Middle Class?

Writing at CNN Money, Tami Luhby or a CNN headline writer asked and answered in a single headline: "Is Obamacare really affordable? Not for the middle class".

Now that's the kind of journalistic efficiency we like to see! But how true is it? Let's dig into the story for the details....

Obamacare is now a tale of two health insurance programs.

For the 85% of enrollees with lower incomes, federal subsidies make the premiums somewhat more affordable. Those even closer to the poverty line can get additional subsidies that reduce the deductibles, which can run into the thousands of dollars.

But for many middle class Americans -- a single person earning more than $47,520 or a family of four with an income of $97,200 -- the pricey premiums and deductibles mean health care coverage remains out of reach....

For the 10.5 million enrollees on the Obamamcare exchanges, health insurance costs are more transparent. And more of the burden falls on the consumers. That is leaving an untold number of Americans opting to remain uninsured, rather than shell out thousands a year for premiums and deductibles. In 2015, 46% of uninsured adults said that they tried to get coverage but did not because it was too expensive, a Kaiser study found.

The big price spikes for 2017 have some current Obamacare enrollees wondering whether they'll renew their plans next year or opt to pay the penalty of $695 per person, or 2.5% of income, whichever is larger.

We thought it might make for an interesting project to consider how 2017's costs for health insurance coverage from the Affordable Care Act (ACA) exchanges might affect a family of four in one of the states that are seeking some of the biggest spikes in health insurance premiums over the previous year.

We selected Arizona, which saw the largest year over year price increase for ACA health insurance in 2017 after having previously ranked among the states with the lowest premiums, which we previously have argued was the result of predatory pricing by one of the health insurers approved to sell health insurance on the state's federal government-operated ACA exchange. Health insurance premiums in the state are now more consistent with those in neighboring states.

We next defined our prospective family of four as consisting of two 40 year old, non-smoking adults and two children under the age of 19. We then went county by county throughout the state to extract the cost of "Silver"-level health insurance coverage available to such a household earning each county's median household income, where we next calculated both the tax credit subsidy they might receive to estimate their monthly premium after subsidies, and also the Affordable Care Act "shared responsibility" income tax they might otherwise have to pay if they were to choose to go without health insurance.

Our results for our hypothetical family of four whose household income puts them exactly in middle of the income distribution of their county are summarized in the following table. If you're reading this post on site that republishes our RSS news feed, but that doesn't neatly render the table below, please click here to access the article as it appears on our site.

Cost of Silver-level ACA Health Insurance for Family of 4 (40-year old, non-smoking couple with 2 children) Earning the Median Household Income for Selected Arizona Counties
Arizona County Median Household Income Before Subsidies: Monthly Premium After Subsidies: Monthly Premium Additional Income Tax (Cost per Month) Monthly Savings (or Losses) to Pay Tax Instead of Buying Health Insurance Comment
Apache $32,396 $1,909 $0 $0 $0 Eligible for fully taxpayer subsidized Medicaid health insurance coverage.
Cochise $45,974 $1,850 $227 $174 $53 Annual savings of $639 to pay the tax instead of buying subsidized health insurance.
Coconino $48,540 $1,909 $261 $174 $87 Annual savings of $1,047 to pay the tax instead of buying subsidized health insurance.
Gila $40,042 $1,728 $160 $174 -$14 More advantageous to buy subsidized health insurance to avoid the additional income tax.
Graham $37,220 $1,850 $131 $174 -$43 More advantageous to buy subsidized health insurance to avoid the additional income tax.
Greenlee $50,818 $1,850 $285 $174 $111 Annual savings of $1,335 to pay the tax instead of buying subsidized health insurance.
La Paz $37,009 $2,260 $480 $174 $306 Annual savings of $3,675 to pay the tax instead of buying subsidized health insurance.
Maricopa $53,689 $1,518 $321 $174 $147 Annual savings of $1,767 to pay the tax instead of buying subsidized health insurance.
Mohave $38,456 $1,909 $143 $174 -$31 More advantageous to buy subsidized health insurance to avoid the additional income tax.
Navajo $36,591 $1,909 $125 $174 -$49 More advantageous to buy subsidized health insurance to avoid the additional income tax.
Pima $46,233 $1,046 $231 $174 $57 Annual savings of $687 to pay the tax instead of buying subsidized health insurance.
Pinal $50,248 $1,728 $279 $174 $105 Annual savings of $1,263 to pay the tax instead of buying subsidized health insurance.
Santa Cruz $47,420 $1,503 $245 $174 $71 Annual savings of $855 to pay the tax instead of buying subsidized health insurance.
Yavapai $44,000 $2,233 $204 $174 $30 Annual savings of $363 to pay the tax instead of buying subsidized health insurance.
Yuma $41,380 $2,260 $174 $174 $0 Almost right at the margin, where health insurance premiums would cost the same as the additional income tax.

In nine of Arizona's fifteen counties, a family of four earning their county's median household income would find it more financially advantageous to pay Obamacare's "shared responsibility" additional income tax than to buy a subsidized "Silver"-level plan on the state's Affordable Care Act exchange. For these counties, the annual savings from choosing to pay the tax instead of subsidized health insurance range from a low of $363 for Yavapai County to a high of $3,675 in La Paz County.

Map of Arizona Counties - Source: http://azarts.gov/programs/poetry-out-loud/

In five of Arizona's counties, a family of four earning their county's median household income would come out financially ahead by buying subsidized health insurance, though here, the annual savings for doing that range from $0 in Yuma County to a high of $588 in Navajo County.

Only Apache County, with the lowest median household income of all counties within the state, a family of four with its median income of $32,396 would be eligible to be enrolled in the state's expanded Medicaid health insurance program for lower income households, and thus would not have to choose between which would be better between paying Obamacare's additional income tax or paying for subsidized health insurance coverage. Across the state, the maximum income for a family of four people to be eligible to enroll in its expanded Medicaid welfare program is $33,534, which is 138% of the federal poverty income threshold of $24,300 that applies for a household of that size.

On just the basis of subsidized health insurance premiums alone then, we find that for household of four people whose annual income is either at, near or above the median household income level for their county within the state, it can be more financially beneficial to choose to pay Obamacare's additional income tax than to buy subsidized health insurance coverage through the Affordable Care Act exchanges. Since the median income defines the middle of the income distribution, this result means that for a majority of such middle class households, Obamacare is less affordable than paying its additional income "shared responsibility" tax for those choosing to go without health insurance.

On a final note, a household with ACA health insurance would still be responsible for paying a considerable portion of any actual health care they might consume, up to the limit defined by the deductible for their insurance, which is above and beyond their basic cost for just having health insurance coverage. In Maricopa County, home to the largest population within the state, the Silver plan with the lowest deductible would require the insured family to pay $2,650 of their actual health care costs out of pocket before the health insurer might start fully picking up the tab for their medical bills.

Once those costs are also considered, a large portion of those below the median household income will find that Obamacare isn't affordable for them as members of middle class.

References

U.S. Census Bureau. 2010-2014 American Community Survey 5-Year Estimates (Median Household Income) via American Fact Finder. [Online Database]. Accessed 4 November 2016.

Kaiser Family Foundation. Health Insurance Marketplace Calculator. [Online Application]. Accessed 4 November 2016.

Health Sherpa. Obamacare Insurance Plans in Arizona. [Online Database]. Accessed 4 November 2016.

U.S. Department of Health and Human Services. Poverty Guidelines for 2016. [Online Document]. Accessed 4 November 2016.