If you’re approaching retirement, make sure you’re prepared.
The American economy is struggling and things may not get better anytime soon.
According to an analysis by the Pew Research Center, almost 90% of the major U.S. metropolitan areas it surveyed between 2000 and 2014 showed a decline in middle-class families. In some cases families have ascended into higher income levels while many others have descended into lower income levels. This study appears to corroborate a nationwide trend that’s been evident for the past thirty years or more.
The effect on the shrinking middle class is chiefly the result of the following seven reasons.
- Wage growth has been relatively stagnant
Although nominal wages have been rising, inflation adjusted wages have been relatively stagnant.
This has a profound negative effect on a major portion of our society. For young adults, the cost to attend college and for senior citizens needing proper medical care costs keeps rising at a faster pace than wage growth. In the last ten years or so, medical care costs have risen faster than the Consumer Price Index and college tuition costs have increased at even a faster rate. These are ominous signs affecting both the young and the old.
Statistics prove a college degree is just about mandatory to landing a well-paying job and being offered promotional opportunities and access to medical care is absolutely essential to enjoying a healthier and longer life.
Any diminution of access to both the education and healthcare sectors will have long-term deleterious effects on the economy and thus, on all Americans.
- Failure to Balance Income and Debt
The wide spread adoption of the use of debit and credit cards has made purchasing products and services much easier but high interest rates and an unbalanced income to debt ratio has made paying for those things more difficult. As a result, most Americans are carrying too much debt in relationship to their income, their ability to handle emergencies or their discipline in allocating funds for savings and investment to ensure a safe, secure and extended retirement.
According to the Survey of Consumer Finances, the debt burden of the average middle-class family in 2013 was more than 120% of annual household income. Although this is down from its peak of more than 140% in 2010, the amount is more than twice as much as it was just 25 years ago.
These high levels of debt are forcing middle class families to divert funds that should be saved for retirement to paying monthly debt payments instead. Families that don’t plan properly or fail to stick to their plan are destined to go from crises to crises until just one unforeseen or unplanned event becomes a financial catastrophe that affects the entire family.
- Historically low interest rates
The Federal Reserve’s low interest-rate policy has been a boon for existing and new homeowners seeking to buy or refinance their homes and businesses that rely on access to cheap capital to expand their operations, hire new employees or develop new markets or finance other business opportunities.
As with so many things that sound good, some groups benefit while others may suffer even though the long-term effects for the nation as a whole may be positive.
There is no question that many middle-class families have benefited from low mortgage rates but with yields on CDs, savings accounts, checking accounts and U.S. Treasury bonds hovering around all-time lows, many middle-class families that counted on the guaranteed income of interest-bearing assets are suffering from shrinking incomes and reduced purchasing power.
With the dramatic stock market plunge caused by the recent recession still fresh on the minds of many middle-class families, it’s no wonder they feel frustrated and afraid because they see no practical way to generate positive real returns.
- Americans Don’t Save Enough for a Comfortable Retirement
It’s an acknowledged fact that an overwhelming number of Americans fail to plan wisely and save sufficiently for their retirement. In fact, of all western societies, when it comes to saving, America ranks in the lower half. To put it another way, 90% of people from the wealthiest country in the world will be facing a longer lifespan with inadequate resources to sustain their pre-retirement lifestyle.
To make matters even worse, according to the St. Louis Federal Reserve, the personal savings rate in the U.S. was recently reported to be a meager 5.7%, which is roughly half of what it was 50 years ago. But because this figure takes into account all workers, it is skewed upwards by a small percentage of ultra wealthy individuals at the top. For the vast majority of Americans, the savings rate is just 4%… and with interest rates remaining historically low, especially for people who’ve reached their 50th birthday during the last ten years, their meager nest egg is not growing anywhere as fast as just a decade ago.
- Limited Upward Mobility
Hillary Clinton, in her bid to be the first American female president, has made a big deal of the growing gap in income and wealth between the wealthiest and poorest Americans. While this is true in every society it should be noted the “poor” in America are much wealthier than the “poor” in other countries and are not denied access to schools, healthcare, clean water, transportation and electricity. Never the less, having insufficient financial capital becomes a major impediment to achieving the American dream and being able to raise yourself and your family into a higher economic strata.
Having less access to capital makes it more difficult to afford the things that make it possible to go to college or get an advanced education. Wealthy people also live longer because their income doesn’t prevent them from receiving higher quality medical care, proper nutrition, decent and safe housing and other things that contribute to longevity and a more satisfying and fulfilling lifestyle.
- Lingering Concerns from the Recession Causing Reduced Optimism About the Future
America is more fortunate than most countries in that we as a nation, have generally experienced more “good years” than “bad years.” However, for anyone living through a recession, job loss, personal crisis or declining health, their judgment and decision-making is much more likely to be affected by their personal experiences than any general trends in the economy.
To a great extent the way most Americans feel about their wealth and security has a lot to do with home prices and the amount of equity they have. When home prices generally outpaced inflation during the period from 1890 to 1997 and then substantially outpaced inflation in the following 10-year period, most Americans got cocky and felt the party was going to last forever.
The axiom “what goes up must eventually come down” proved to be true when prices crashed after 2007. This resulted in a real net loss of personal wealth and a damaged psyche that has now influenced the way we shop and our attitudes about what we buy, how we save and new concerns for providing for our children, particularly in the area of being able to finance their education. If you haven’t been paying attention, student debt now exceeds credit card debt and now is in excess of $1,400,000,000,000. To put it another way, that’s $1.4 trillion. For those of you who are mathematically challenged, a trillion is one thousand billion and a billion is one thousand million. Now close your eyes and just imagine how much stuff you could buy with just one million dollars.
When you consider that in the 14-year period after 2000 median income for middle-class households dipped by 4% and then add to that the average family’s growing debt, stagnant income and falling home prices, it’s no surprise that the actual median wealth of American middle-class families fell about 28%. It’s no wonder most Americans are concerned about their families financial future.
- The Gig Economy and the Loss of Secure Employment
Just look around you. I’ll bet most of the products you depend on today, were just a glimmer of an idea less than twenty years ago. Just to give one example, whom do you know that could afford a portable phone just twenty years ago?
Remember that 10 lb. “brick” a handful of jerks carried around as if to show how important they were compared to us common folk? Now every teenager in America can’t live without one. But that’s not all. That simple hand-held phone has morphed into a super powerful computer, one that is magnitudes more powerful that the room-sized computers that were relied upon to send John Glen to the moon… and now instead of communicating just by voice, you have text, pictures and video. And along the way this little marvel has spawned entire new industries like apps and e-commerce and some of the biggest or wealthiest companies today didn’t even exist just two decades ago.
Who would believe that AirBnB, a company that owns no real estate would be worth more than Holiday Inn, Hyatt and Marriot combined? Or that Uber would be worth more than several of the biggest taxicab companies in the world combined and it doesn’t own a single car?
While progress is generally good, there is also a downside… and sometimes that downside just sneaks up on you and you’re totally unprepared for the consequences. Ten years ago if you conducted a survey among watch manufacturers and asked them who their most feared competitor was, I highly doubt any one would have said Apple, a company that wasn’t even in the watch business at that time. Still, the iPhone was the chief reason that most young people stopped buying watches. The same can be said today about certain retail stores… when was the last time you went into a local bookstore? Rented a movie from Blockbuster? Or (dare I say) smooched in a drive-in with your sweetheart?
Soon, it will not only be acceptable but it will be commonplace to have driverless cars, 100% robot factories, Internet diagnosed healthcare and the list goes on and on. The point is that whatever your occupation or skill set, get prepared that it will be disrupted and if you’re one of the many millions who are not preparing for it, while the availability of the good life will be more plentiful, the ability to pay for it may be lessened.
Full time work, with extensive benefits and security is being replaced by part-time employment with no benefits and no security so plan now and be prepared because change isn’t coming… it’s already arrived.
Based on data from the U.S. Bureau of Labor Statistics, more than 6 million people were working part-time but they weren’t working part-time by choice. Many economists are predicting this number will rise substantially over the next decade as the “gig economy” spreads to even more industries and computers and robots take on an ever-widening share of mundane tasks that can be automated.
If you and your children are not prepared to obtain and maintain the education and skills required by our every growing reliance on technology because you can’t afford to attend a college or a technical institute, be prepared for a future that is far less comfortable and secure than your parents enjoyed… and that’s the beginning of the end of the American dream for you.
But there’s still hope for those who act quickly.
As the huge number of baby boomers begin to retire, many new companies have been formed to provide them with a wide variety of products and services to make their senior years, safe, secure and fulfilling. Some of these services are obvious like health care products, others involve arranging travel and leisure activities and some involve philanthropic and charitable activities.
If you haven’t prepared for retirement, there’s no better time to start than right now. If you don’t know what to do, there are professionals who can help. Start with your CPA, attorney, union or contact a professional organization to find a local advisor. Just don’t put this off any longer… your future depends on it.