Barron’s: ‘Motherhood Penalty’ Ranges as High as $600,000. Here Are Some Tips to Catch Up.

By Gail MarksJarvis, March 19, 2022 10:03 am ET

When the pandemic hit in 2020 and shut down schools, Samantha Goodman decided there was no way to work and care for her son, now 6. So for two years she gave up on having a job or saving for retirement.

Now the Chicago mother is among a wave of parents, mostly women, who’ve gone back to work or are looking to do so as the pandemic eases.

Staying home was a distressing choice, she says, so she quickly searched for a job to make up for more than two years of lost paychecks and 401(k) savings as soon as schools reliably opened. “You wonder all the time if it’s the right decision. Lifetime finances were always in the back of my mind,” she says.

Although Goodman worries about the long-term impact of relying primarily on her husband’s income as a data engineer, she accepted only a six-month part-time data analytics contract in February—afraid of locking herself into a full-time job if Covid closes down schools again. There still is no 401(k) and the pay is small compared with what she hopes to make once pandemic threats clear, but for now she is willing to accept the trade-off.

Economists have long found what is known as the “motherhood penalty” for women who leave jobs, or cut back on work, to care for children. Besides losing pay while away from work or reducing hours, there can be substantial long-term financial sacrifices: lost opportunities for advancement, raises stunted because they build on low early-career salaries, and compromises in retirement since lower pay reduces Social Security, pensions, and the ability to save in 401(k)s and individual retirement accounts.

Financial professionals say there are a number of steps to mitigate the impact of the motherhood penalty, and a large body of economic research provides insight for millions of women with similar concerns as they debate when to go back to work.

The impact is harsher on single women than married women, who can get the benefit of a husband’s earnings and savings. Married Americans have twice the average assets as divorced or never-married people as they near retirement, according to research by University of Virginia sociology professor W. Bradford Wilcox. Using the National Longitudinal Survey of Youth in 2016, he contrasted the average assets of $640,000 for 51- to 60-year-old married people with $167,000 for divorced or never-married singles.

Even married women, however, can feel the motherhood penalty in retirement because women typically live longer than men. About half of married women need savings to last until 90.

The Penalty’s Toll
Estimates of the motherhood penalty have ranged from $161,000 to $600,000, notes Cindy Hounsell, president of Women’s Institute for a Secure Retirement. But the actual impact depends on how much time a woman stays home or reduces work hours, why she left a job in the first place, the number of children, her occupation, whether she cuts back on work again to care for a parent or family member, and the economic climate when she re-enters workforce.

The recession of 2007-09 was brutal on people looking for jobs. In a 2018 paper, economist Marta Lachowska, of the W.E. Upjohn Institute for Employment Research, says that five years after losing a job in that recession people were earning 16% less than those who had continually worked. Other studies, not focused on the recession, have reported average motherhood wage penalties ranging from 5% to 10% per child among women in their 20s and 30s.

Men are typically spared from a similar financial impact as women because few leave jobs for long to be a stay-at-home parent. A Minneapolis Federal Reserve paper notes that “nearly all fathers” who disrupted work early in the pandemic returned to work quickly, “while mothers regained virtually none of their lost ground.”

Apart from the pandemic, economist Matthew Rutledge of the Center for Retirement Research at Boston College has found that mothers with one child have lifetime earnings 28% less than childless women and that each additional child lowers lifetime earnings by 3%. Mothers with one child receive 16% less in Social Security than nonmothers, and each additional child reduces benefits by an additional 2%.

To understand the possible forces on a lifetime, Rutledge considered for Barron’s a hypothetical 30-year-old woman who was making roughly $61,000 a year when the pandemic hit, had been working since leaving college at age 21, and had been saving 9% of pay in her 401(k) each year. By that point she had accumulated almost $50,000 in her 401(k).

With a child out of school in the pandemic, this woman leaves her job and stays home for four years, earning nothing and saving nothing for retirement. When she goes back to work, she earns $53,000 a year—an 8% penalty for each year away from work. If she had stayed employed and received 3.5% annual raises, she would have been making $72,000.

At retirement, the woman who temporarily left her job will have roughly $1.1 million in her 401(k) rather than the $1.5 million she would have had with a continuous job and a 6% annual return on her retirement investments. Her Social Security will total roughly $168,000 if she lives to 90, instead of the $198,000 she would have had without an absence from work.

Rutledge calls this outlook for 401(k) and Social Security benefits optimistic because it assumes that the woman is able to get right back into a job with a 401(k), and that she keeps working until starting Social Security at 67.

How to Play Catch-Up
“This doesn’t mean you shouldn’t be home with children if you think they need you,” said Sheryl Garrett, a financial planner and Garrett Planning Network founder. “But it also doesn’t mean to ignore what it means now or for your retirement later.”

Financial pros say there are a number of ways women who find themselves hit by the motherhood penalty can play catch-up. If a woman is married and her spouse is working, as much as $6,000 a year can be put into a Roth IRA or traditional IRA on behalf of the wife even if she is not working and has no access to a 401(k), Hounsell says. When a woman goes back to work, she should make retirement saving a priority, she adds.

Divorced women also should be aware that if they were married for at least 10 years before divorcing, they will be entitled to spousal Social Security benefits in retirement. Based on their former husband’s lifetime earnings, these benefits usually are higher than Social Security for women who took time from work for children or caregiving.

Women should also consider working longer to boost their own Social Security and retirement savings. A study by Stanford economist John Shoven found that retiring at 66, rather than 62, allows a person to lift their standard of living by a third.

And individuals over 50 can turbocharge their retirement savings by stashing as much as $27,000 in 401(k)s, instead of the $20,500 limit for those under 50, or $7,000 in a Roth or traditional IRA, instead of $6,000.

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Barron’s: How to Play the Downturn: Buy the Dip. Harvest Tax Losses. Do a Roth Conversion

By Neal Templin, Jan. 25, 2022 8:14 am ET

When stocks tumble, there are simple steps you can to take to come out ahead before they bounce back.

Market declines like those of the past few weeks can be scary, painful events. But they also present opportunities for tax-loss harvesting or trimming your future tax bill through Roth IRA conversions. And investors of all stripes can improve their long-run returns by rebalancing during bear markets and buying equity on the cheap.

It is best to have a market downturn plan in place before the downturn occurs with all its “fear and uncertainty,” says Greg Will, a Frederick, Md., financial advisor. “If you have a plan before, and you’re just pulling the trigger, you’re going to have a much better success rate.”

Even if you haven’t planned for the downturn, the brief but violent plunge in 2020 at the beginning of the Covid-19 pandemic underscores the value of being ready for a rebound. Shares in the S&P 500 plummeted by about a third in February and March, then climbed about 75% in the next 12 months, and prepared investors were able to capitalize on the decline and ride the rebound.

Roth Conversions

Suppose you already were planning to do a Roth conversion during 2020, moving money from a tax-deferred individual retirement account to a tax-free Roth account. The money moved in this maneuver is taxed as ordinary income. If you kept your cool and did the conversion during the bottom of the 2020 dip, you would have paid a third less in taxes because the shares being transferred had dropped in value. And when those shares rocketed up after that inside the Roth, all those gains would have been tax-free.

Will says he had a high-income client who saved about $70,000 in federal and state taxes by doing a Roth conversion during the pandemic dip. Shares that were worth $400,000 were suddenly worth $250,000, reducing the tax bill for the conversion. In addition, he didn’t have to pay the taxes on the transaction until the next year when all his investments, including those used to pay the conversion tax bill, had already rebounded.

You shouldn’t do a Roth conversion during a market downturn unless it made sense for you to do one anyway, advisors and accountants say. In general, you want to do them when you are paying a lower marginal tax rate now than in the future. You come out ahead by paying the taxes now, and letting the money grow tax-free inside a Roth account, rather than keeping the money in a tax-deferred account and paying higher taxes when you pull the money out at some future date.

Retirees who are living off savings and haven’t begun drawing Social Security or taking required minimum distributions from their tax-deferred accounts are often in low tax brackets for a few years and can benefit from doing a Roth conversion, says Bill Reichenstein, head of research at Social Security Solutions.

By getting money out of tax-deferred accounts, they will also lower their required minimum distributions when they turn 72. Large RMDs can result in more of their Social Security benefits being taxed, plus force higher-income retirees into higher brackets for Medicare premiums, Reichenstein notes.

Tax Harvesting

For investors with large taxable accounts, market downturns are great opportunities to create tax losses whether or not they’re doing Roth conversions. Suppose you buy $100,000 of an S&P 500 index fund, and it immediately declines 25%. You sell your shares for $75,000 and book a $25,000 tax loss. You can use that loss to offset gains or deduct $3,000 a year on your tax return until it runs out.

It’s important to note, however, that the Internal Revenue Service’s wash-sale rule bans you from rebuying the same investment within 30 days and claiming a tax loss. Presuming you don’t want to be out of the market for a month and miss a rebound, you can take the $75,000 and buy a Russell 1000 index fund, which has almost the same performance as an S&P index fund but is different enough to not violate the wash-sale rule, accountants say.

You can even more easily create tax losses with individual securities, which are more volatile than broad market indexes.

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WSJ: Stop Tracking Spending and Other Money Tasks to Take Off Your To-Do List

Here are some things financial advisers suggest avoiding in 2022

By Veronica Dagher, Dec. 28, 2021 11:34 am ET

When it comes to your money, sometimes doing nothing is the best thing to do.

Financial to-do lists abound at this time of year, and it’s always smart to check on the rules around charitable giving or set financial goals for the new year. Knowing what to skip is just as important, though—so consider this list of suggestions from financial advisers as a 2022 to-don’t list.

Don’t rush to pay off a low-interest mortgage
With inflation predicted to rise, paying off fixed-rate mortgage debt ahead of schedule might not make sense.

Don’t overpay for items because ‘supplies are limited’
Consumers might normally wait for a sale, or at very least shop around to get the best price, said Bobbi Rebell, a financial planner and personal finance expert at Tally, a credit-card debt management app.

Now, many retailers are putting language on their websites such as “only a few left” to push shoppers to click the “buy” button amid supply-chain shortages, shipping delays and rising inflation. Retailers also often follow up with targeted emails and text messages warning us that say, the pajamas we love will be gone if we don’t buy them immediately.

Don’t succumb to the pressure.

Don’t track your spending down to the dollar
Tracking every last dollar of your monthly spending can feel empowering at first but is hard to sustain. Using a simpler approach such as designating 50% of your paycheck for essentials such as rent, 20% for savings, and 30% for everything else.

Don’t fall prey to FOMO
You may feel a pang for not owning cryptocurrencies or the latest stock sparking conversations on Reddit, but don’t feel the need to jump in. It may feel like a wise choice to get in, but chasing hot stocks often leads to underperformance in your returns as their outperformance won’t last forever, he said.

It’s fine to stick with time-tested investment strategies, such as a low-cost, well-diversified investment portfolio of stocks and bonds.

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Barron’s: HSAs Are Unappreciated and Underutilized.

By Cheryl Winokur Munk, Nov. 23, 2021 11:32 am ET

With open enrollment for workplace benefits in full swing for many clients, some financial advisors are encouraging the use of health savings accounts, or HSAs, as part of an overall financial plan.

HSAs were created in 2003, but they aren’t as widely understood or embraced as 401(k) plans or IRAs. That’s where advisors are getting involved—offering guidance on the ins and outs of these tax-advantaged accounts and even helping clients pick the investments, in some cases.

Getting down to basics. Contributions to an HSA account reduce your taxable income on federal returns, and most states offer the same tax advantages. Meanwhile, investment earnings in an account grow tax free. Additionally, there’s no federal income tax on withdrawals when they’re used to pay for qualified medical expenses, which can include prescription drugs, doctor’s office copays, and, thanks to the Cares Act, even menstrual care products, over-the-counter products, and medications without a prescription. This triple-tax advantage makes it an ideal account for those who qualify.

It’s especially advantageous if clients can afford to pay medical expenses with after-tax money and leave the money in the HSA to grow tax-free, says David Mullins, founder and owner of David Mullins Wealth Management Group in Richlands, Va. He estimates that about seven in 10 clients aren’t familiar with the benefits an HSA offers.

Of course, HSAs aren’t for everyone. You have to have an HSA-eligible, high-deductible health plan in order to contribute. There are also yearly contribution limits. Next year, an individual can contribute $3,650 and a family $7,300, a modest increase from this year. People age 55 or older can make an additional $1,000 annual catch-up contribution through age 65 or until they enroll in Medicare.

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WSJ: Roth IRA Conversions: When’s the Best Time to Start?

You may be reluctant to do it now because of the tax hit upfront. But that may be short-term thinking.

Most people for whom Roth IRA conversions make sense typically should start making them as early as their 40s and 50s.

By Glenn Ruffenach, Oct. 21, 2021 11:00 am ET

Reader Question: My wife and I are about 10 years from retirement. We want to begin converting money in our individual retirement accounts to a Roth IRA, but the tax bite looks like a problem. We’re already in a higher tax bracket than we like. Any advice? When, or how, should we start converting?

Actually, starting today could make more sense than you think. As for “how,” the answer is: slowly but surely.

This question gives me the chance to address a common failing in retirement planning: waiting too long to begin converting a traditional IRA to a Roth IRA. (Assuming, of course, that such a move makes sense financially. More in a moment.) Yes, most IRA holders are aware that such conversions are possible. But many drag their feet. They recognize, as your question indicates, that the conversion itself is taxed; accordingly, they frequently wait—and wait—until they are in a low or lower tax bracket to begin the process.

In reality, though, and I can’t emphasize this strongly enough, “converting”—or, at the least, thinking about converting—should be part of one’s financial planning long before retirement. Certainly when you’re in your 40s or 50s.

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Barron’s: Considering a Roth IRA Conversion? There’s No Time Like the Present.

WSJ: Should ESG Funds Be In Retirement Plans?

Few 401(k) plans have an ESG investing option. We asked advocates on each side to make their best case for why that should—or shouldn’t—change.

By By Aaron Yoon Sept. 16, 2021 11:00 am ET

Just 2.6% of 401(k) plans had an ESG option as of the 2019 plan year, according to the Plan Sponsor Council of America.

Investors are pouring record amounts of money into mutual funds and exchange-traded funds that screen holdings based on environmental, social and governance (ESG) factors.

Yet, odds are most people won’t find an ESG fund option in their 401(k) retirement-savings plan. Just 2.6% of 401(k) plans had an ESG option in 2019, according to the latest data from the Plan Sponsor Council of America.

Amid lobbying from Wall Street, the Labor Department this year declined to enforce a Trump-era rule that would have made it harder to add ESG funds to retirement accounts. Whether and when more definitive guidance is coming remains to be seen.

Proponents say there is no good reason to keep ESG funds out of 401(k) plans. Opponents say adding such funds to 401(k)s would be a breach of fiduciary responsibility because there is no global standard for defining and measuring ESG performance.

Offering employees the option of investing in environmental, social and governance (ESG) funds in their 401(k) retirement-savings plans is essential. If individuals are making clear that they want the option to invest this way, there is no good reason to deny them the opportunity to do so in their 401(k) accounts.

Overall demand for ESG investing is growing. According to fund researcher Morningstar Inc., a record $51.1 billion flowed into U.S. sustainable funds in 2020, more than double the amount in 2019 and nearly 10 times the total for 2018.

The argument that ESG funds serve only a “feel good” purpose, but don’t produce adequate returns, is a misconception. Research that I conducted with colleagues showed that firms with good ratings on “financially material” ESG issues—that is, ESG issues that are relevant to the sector in which a company operates—deliver superior stock returns. Similarly, an analysis from S&P found that from March 2020 through March 2021, 19 ESG-themed exchange-traded funds and mutual funds with more than $250 million in assets under management outperformed the S&P 500 by anywhere from 0.2 to 27.9 percentage points.

Clearly, not only is ESG a bona fide investment strategy, but the growing demand means adding such funds to 401(k) lineups might even encourage more people to participate in their employer-sponsored retirement-savings plan.

That said, choosing ESG funds wisely can be a challenge.

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WSJ: Target-Date Funds: What You Need to Know

Some 40 million Americans have put at least part of their retirement money in these funds. And yet many investors are still in the dark about them.

By Bailey McCann, Sept. 3, 2021 10:00 am ET

For investors who want a “set it and forget it” retirement account, target-date funds have been the go-to solution.

An estimated 40 million Americans have put at least part of their retirement money in target-date funds since they first started hitting the market in the early ’90s. The amount of money in target-date mutual funds and exchange-traded funds—whose mix of stocks and bonds go from riskier to more conservative over time—has now reached $1.746 trillion. If you have a 401(k) or other retirement account that invests in the market, chances are that some of your money is in a target-date fund.

But many investors are in the dark about target-date funds—how they work, how much they cost, whether there are risks.

At the same time, some members of Congress have questioned whether these funds are worth it for investors. In May, members of the House Committee on Education and Labor as well as the Senate Committee on Health, Education, Labor and Pensions requested that the Government Accountability Office investigate target-date funds.

What is in these funds, and why are they being scrutinized? Here’s what you need to know.

How do the funds work?
Typically, target-date funds include a mix of stock funds and bond funds. These can be either actively managed mutual funds or index funds (and there are also target funds in the form of collective investment trusts—low-cost investment vehicles that use strategies similar to mutual funds). The exact mix of stocks and bonds is partly based on an investor’s age when they enter the fund and partly on when the investor plans to retire. Target-date funds create what is called a “glide path” based on this information.

Generally speaking, the glide path is designed so that the portfolio is growth-oriented during an individual’s prime earning years and then shifts to a focus on capital preservation the closer someone gets to retirement—the “target” year. (That target year will usually be part of the fund’s name. A fund with 2022 in its name, for example, is geared for someone retiring next year.)

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WSJ: How to Know if Your Retirement Savings Are on Track

Ask Encore: Answering a reader’s question on navigating rules for required minimum distributions

By: Glenn Ruffenach, Published April 1, 2021

Saving for retirement can be daunting for many, especially since most Americans struggle to navigate the uncertainty of being on track. In fact, 50% of all U.S. households are at risk of not having enough savings to maintain their living standards in their retirement.

One of the biggest mistakes made when people prepare for their retirement is that they do not get a comprehensive financial checkup about 10 to 15 years before they actually retire. There are a number of financial firms and individuals that have published guides and/or equations to help people figure out how much they should have in their savings at different ages. Some develop benchmarks for savings or have a set of retirement milestones.

A wise endeavor would be to find and build a relationship with a trusted financial advisor.

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Fulfilling a required minimum distribution while having multiple retirement plans can raise some questions. This article can help answer some of them.

NY Times: Making Sense of Elevated Stock Market Prices

Shares are very expensive, but so are bonds. Even at current prices, the economist Robert J. Shiller says, it is reasonable to keep some wealth in stocks.

By Robert J. Shiller, March 5, 2021

The stock market is already quite expensive. That is evident when you compare current stock valuations with those from previous eras.

But it is also true that stock prices are fairly reasonable right now.

That seemingly contradictory conclusion arises when you include other important factors: interest rates and inflation, which are both extremely low.

Examined on their own, stock valuations are at giddy levels, yet they are far more attractive when viewed side by side with bonds. That’s why it is so hard to determine whether the stock market is dangerously high or a relative bargain.

Consider that the S&P 500 index of U.S. stock prices has repeatedly set records over the past year, while a measure that I helped to create, the CAPE ratio for the S&P 500, is also at high levels.

In my view, the CAPE ratio is the more important of these two measures of overpricing because it corrects for inflation and long-term corporate earnings. John Campbell, now at Harvard University, and I defined CAPE in 1988. This is a bit technical, but please bear with me: The numerator is the stock price per share corrected for consumer price inflation, while the denominator is an average over the last 10 years of corporate reported earnings per share, also corrected for inflation.

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nerdwallet: ESG Investing: A Beginner’s Guide

You’ve likely heard of “voting with your dollars,” or using your money to make purchases at businesses you believe in. But choosing your local bookstore over Amazon isn’t the only way you can make an impact. There are strategies, such as ESG investing, to put your investment dollars to work in a similar way.

What is ESG investing?
Environmental, social and governance, or ESG investing, is a form of sustainable investing that considers an investment’s financial returns and its overall impact. An investment’s ESG score measures the sustainability of an investment in three specific categories: environmental, social and corporate governance.

Why should I care about ESG investing?
Aside from the benefits of creating a more ethical portfolio, there is evidence that ESG investments deliver similar returns as traditional investments — and potentially carry less risk.

ESG investing and high returns
A 2019 white paper produced by the Morgan Stanley Institute for Sustainable Investing compared the performance of sustainable funds with traditional funds and found that from 2004 to 2018, the total returns of sustainable mutual and exchange-traded funds were similar to those of traditional funds. Other studies have found that ESG investments can outperform conventional ones.

JUST Capital ranks companies based on factors such as whether they pay fair wages or take steps to protect the environment. It created the JUST U.S. Large Cap Diversified Index (JULCD), which includes the top 50% of companies in the Russell 1000 (a large-cap stock index) based on those rankings. Since its inception, the index has returned 15.94% on an annualized basis compared with the Russell 1000’s 14.76% return.

ESG investing and lower risk
The same Morgan Stanley study found that sustainable funds consistently showed a lower downside risk than traditional funds, regardless of asset class. The study found that during turbulent markets, such as in 2008, 2009, 2015 and 2018, traditional funds had significantly larger downside deviation than sustainable funds, meaning traditional funds had a higher potential for loss.

ESG funds have even managed to post strong performance during 2020. Of 26 sustainable index funds analyzed by investment research company Morningstar in April, 24 outperformed comparable traditional funds in the first quarter of 2020 (and the beginning of the COVID-19 pandemic).

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