Americans don't save anymore. For the last 25 years, the US savings rate has continually decreased, reaching its current negative level in the first half of 2005. (Interestingly enough, the savings rate started declining with the use of massive deficit spending championed by supply-side economists. Coincidence?) Now, as baby boomers are heading into retirement it appears their lack of financial foresight will catch-up to them. According to an
FDIC report, many are not prepared to retire.
The report first notes:
While there is no definitive standard for how much a person needs for retirement, many baby boomers appear to have a net worth insufficient to meet basic requirements, according to some guidelines. In 2004, the median net worth of families headed by baby boomers between the ages of 45 and 54 was $144,700. However, these data are somewhat difficult to interpret as wealth holdings in the US are skewed to the top 10% of families. The median family net worth was $1700 for the lowest 25% of US households and $43,600 for those in the 25th to 49th percentile. In contrast, those in the 75th to 89th percentile had median family net worth of $506,800, while the figure for those in the top 10% was $1.4 million. These data do not apply only to baby boomers, however. Chart 3 suggests that although many families have a fairly substantial amount of assets, a large number have few resources with which to supplement retirement income.
First, the Right Wing Noise Machine, econ division, loves to the use household net worth from the Federal Reserve's Flow of Funds statement as a statistic that shows how strong the economy is. However, the figure on the Flow of Funds statement is a macro-statistic, an aggregate statistic of all US households. This paragraph notes the bottom 50% of US aggregate income category's have little net worth. In other words, the top 25% greatly skew this statistic higher.
Note how the top 25% of income holders have a median net worth that is 11 times to 32 times larger than the bottom 50 percent of income holders. This huge disparity greatly skews the net worth figure higher, clouding the underlying fact that a large portion of Americans have little to no real net worth. The lower income brackets clearly have insufficient assets to retire. In addition, they have insufficient assets to adequately deal with most financial shocks such as a critical medical diagnosis or extended loss of a job. The report also notes this data apply to the entire population, not just baby boomers.
Just because someone has a wealth does not mean it is quickly or easily accessible.
The single largest source of wealth for retirees is often an illiquid asset, real estate. It is useful, therefore, to look separately at non-real estate assets for a realistic picture of available assets for a realistic picture of available assets retirees have accumulated. Although 94 percent of families headed by persons aged 45 to 54 held at least one type of non-real estate financial asset in 2004, the median holdings of financial assets for this group were only $38,600. These data include 58 percent of families that held a median of $55,500 in retirement accounts (which includes IRAs), but only 18 held the next largest asset category pooled investment funds ($50,000). Even fewer - less than 7 percent - held the third and fourth largest asset categories, other managed assets and bonds ($43,000 and $30,000, respectively). For the average person, financial assets would not last long in retirement.
The argument often put forward defending the use of real estate investments as a means of investment is the increased financial tools available to access real estate wealth. For example, home equity loans (more tradition and reverse loans) are now common. However, there are several factors that make these less than attractive as retirement vehicles.
First, these are loans that must be repaid. A traditional home equity loan is a loan by any other name. A reverse loan must be repaid, usually when the present owner sells his house. The RWNM sells home equity as though it were free money. This is a lie - it is a loan. Secondly, these loans are market dependant. The argument advocating loans as retirement vehicles assumes a strong or stable real estate market. However, the current real estate market is weakening. Inventories of new and existing homes available for sale are at multi-year highs. Total mortgage debt outstanding is also at a historic level. Home affordability is at historic lows. All of these facts point to an over-valued real estate market, which could negatively impact the availability of home equity loans. Should the real estate market start to correct, other financial assets will be the source of retirement income.
Outside of real estate, the boomers clearly have insufficient assets to retire. Median non-real estate assets were only $38,600. This is clearly not enough to retire one. In fact, it is not enough to survive a major financial shock. It's that simple.
So, what will happen? It is highly likely retirement is not a viable option for any of these people. As a result, they will have to stay in the workforce in some capacity. So much for retiring in leisure.
