Economic optimism has been in short supply in recent years and with good reason. Today I opened my eyes to a beautiful sunrise and was compelled to share. I’m reminded one must take the good with the bad in life. Well, we finally have some good news despite the recent report indicating an American household’s net worth has been set back 20 years.
The Bad. The Fed study on household wealth focused on the gigantic financial hit taken by nearly all Americans since 2007. In 2007, near the boom’s height, older households (between 55 and 64) had a median net worth of $266,200. That figure included everything — home equity, savings, 401(k) s, etc. By 2010, though, the nest eggs of Americans approaching retirement had shrunk dramatically, falling to $179,400 — a 33 percent drop. The main reason for this was the collapse of the housing market, with home equity accounting for the lion’s share of older Americans’ net worth.
Older workers also experienced a drop in earnings, making it harder for them to stash away cash and make up for losses to their net worth. Indeed, barely over half of all families in the 55 to 64 group reported to the Fed that they saved money in 2010. Only 60 percent of families, 55 to 64, even have a retirement account where they take advantage of tax breaks for retirement savings. The median amount of money in such accounts is $100,000.
The good starts with 2 months in a row of improvement in the housing market. I’ve long maintained that 24 months of improvement in housing however slight, will trigger increased market confidence and stimulate investment, lower unemployment rates and increase the rate of domestic growth from the 1-2% to 2-4% range or higher. The housing market is where it all started; and is the initial wound we must continuously heal to become well. Domestic energy development, competitiveness, debt reduction, and U.S. growth/productivity are keys to long-term recovery.
As the burden of Real Estate market lessens other sectors of the economy will become more naturally buoyant and more able to increase productivity. Clearly we face a wave or two of foreclosures before the end of the decade but hopefully they will not be Tsunamis. The bigger the wave the longer it takes to reach the light at the end of the tunnel.
As Europe responsibly tackles its economic crisis and growth slows in China, Brazil, and India, America has an ace in the hole. Demographics. The U.S. is positioned to experience population growth for the rest of the decade when the rest of the world is not. We are fortunate to have our own growing market in which to sell goods and services. This is a direct result of legal immigration.
By the end of the decade the U.S. will likely secure more market share in global trade particularly in Europe, and China. The United States demographics help give us a leg up on the competition. Corporate America is also flush with cash on the sidelines. The U.S. household debt ratio according to the Federal Reserve has dropped from 13.96% in 2007 to 10.88 in 2011. This is significant.
I believe the long hard economic slog through the end of this decade will continue now with a clear light at the end of the tunnel. The question then becomes when will the economy become a certainty as opposed to its current uncertainty? When will the U.S. economy provide 100% economic security for retirees?
Never. Gone are the days of spending while home appreciation, pensions, and Social Security took care of the fast approaching future. Inflation is a stealth bomber for future retirees. Health Care despite the recent Supreme Court ruling is the elephant in the room.
What is the actual size of a U.S. citizen’s bill to be paid collectively on the day (s) of reckoning on potentially eight trillion dollars, likely half of this decades U.S. debt? This represents roughly 89k per household over this decade. For the sake of argument let’s say the second round of cuts (two trillion) after the initial four trillion currently in play (Simpson/Boles) is then followed by another two trillion. This third round of U.S. debt reduction (two trillion) will likely alter a bit the way America looks to most any retiree. However these changes will prove manageable for those properly prepared.
Roughly half of future U.S. retirees will achieve their financial goals by the time they retire. The other half will be looking for how to best adapt to their tougher financial circumstances.
Irrespective of ones personal finances I’ve often espoused the importance of “Creative Work” for compensation or not. I assert creative work is critical for one’s health and well-being (happiness) all throughout ones retirement years.
Retirees seeking compensation from creative work to help pay some bills soon realize economic security can come from having many small streams of income. In some cases developing more and more little streams of income provides the stability needed to postpone taking their Social Security benefit until the last possible moment. This results in a significantly larger benefit check when one needs it most.
All Americans walk together on this decade-long-fiscal-path that at times will continue to be rocky. But now there is light at the end of the tunnel. Regardless of one’s personal finances individuals benefit from continuing to pay down debt. My reasoning is simple and applies regardless of one’s finances.
Flexibility is the new economic security for U.S. retirees. Debt free Individuals have more options, more flexibility in spending. They will have more disposal income to spend which will help the economy. The difference will be it will not be borrowed money. When one enters retirement sans debt one has greater flexibility.
Retirees with multiple streams of smaller incomes from creative work in retirement experience increased economic stability and personal fulfillment. Sustained economic stability can provide options like delaying and maxing out pensions and Social Security benefits. Performing creative work without compensation and performing seasonal work for compensation is another approach.
For those future retirees opting to work in their current careers until they reach the age 67 or 68 years of age one must realistically consider health related concerns as potentially shortening one’s shelf life. A back –up plan is recommended.
Unfortunately for most future retirees 100% economic security is history. The future has replaced it with an individual’s economic flexibility.The more economically flexible an individual is the more secure they really are.
The U.S. Government will be forced to slowly pay down its debt to acceptable levels eventually restoring confidence from around the globe spurring investor confidence. The cuts won’t be easy and will likely alter the landscape for future retirees.
Just as previous generations of Americans we must take the good with the bad in life.
Low interest rates can help many future retirees pay off their debt before entering retirement. It won’t be easy. The expectation or reward may still be seen as economic security when in fact for most it is economic flexibility.
Make no mistake the “Great Recession” has a hidden cost beyond the obvious job loss or job security loss or household’s net worth loss one sees today. Economic security has been exchanged for economic flexibility. Increased Economic flexibility is the new financial security.
The good news is Americans and specifically future retirees are on a positive path albeit a long arduous and still bumpy path. The day Americans awaken to 24 months of gains however small in the housing market will be a day to truly celebrate. Eventually retirees can enjoy higher interest rates which will finally reward the savers. Someday we’ll clearly see the bright light at the end of the tunnel. I got my first glimpse at sunrise this morning.