I regularly look at the data on how little people were able to save under the present system. It is really a shame because it is not about people not doing the right thing as much as people being sold faulty retirement income strategies. Recently, several media articles about how little people have saved have been distributed. So I thought the readers of BiggerPockets would be interested in what the latest numbers show us. The definitive study is done by the Federal Reserve every three years. They just started the 2013 study, so we will look at the 2010 study.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Federal Reserve Household Finances Survey
The top line number is household net worth. Net worth is all assets minus debts. All numbers given are the median number, which represents the best statistic to understand this data because it is not skewed by the large concentration of wealth in a few hands.
Median Net Worth in 2010 was $77,300. A drop from $126,400 in 2007. Obviously the recession hit families hard with drops in all asset classes in those years.
In the 55-64 age group [head of household]the median was $179,400. That is the group that is heading into their retirement years! There was a drop from $266,200 since 2007.
Even more scary is in the 80-90% income range [Median income of $114,600] the net worth for these families was $286,600. So these upper middle class families, with substantial income streams have only been able to muster a net worth of a little over two years income.
Savings; Retirement Accounts; Other
The median retirement account for all families that have a retirement account is $44,000. For those in the 80-90% income range with a median income of $114,600 it is $88,000. For those in the 55-64 age group it is $100,000. Now here is the kicker only 50% of families own a retirement account. So these numbers only apply for the top 50% of people who save!
Other places where families put savings are Certificate of Deposits [$20,000], pooled investments [mutual funds]$80,000, cash value life insurance $7,300, stocks $20,000, and bonds $137,000. These numbers are skewed because so few families actually own individual bonds, for example, and the ones that do tend to be the wealthiest families.
As an aside, the higher up the income level you go, the more likely that they own individual stocks, privately held stocks [mostly businesses], cash value life insurance, investment real estate and bonds. The smaller the percentage of mutual funds are owned the further up you go..
How do You Compare?
I hope all that are reading this blog compare favorably to these rather pathetic numbers. The amount of people that do not have available a defined benefit pension has risen to over 85% in current society. The amount of current retirees that social security represents their highest income source is 60%, while 33% are totally dependent upon SS. This is a huge societal problem.
Bad Strategies Lead to Bad Outcomes
The financial planning industry likes to blame individuals for this crisis. But the facts are very different than what they want people to think. The strategy of investing in mutual funds inside a IRA/401K wrapper has many fatal flaws. First is the high volatility that does two things, it panics people and it is difficult to turn those investments into sustainable and steady retirement income. When we look at why the amounts are so low in retirement accounts, we see that people do save inside of them, but stop saving or sell their equity funds AFTER a major stock market drop. This leads to lack of confidence in the strategy and a reticence to get back to investing in it later. Much of the financial planner industry time is spent trying to work around these problems, that really have no work arounds. Human psychology dictates this behavior, not some impaired set of morals. Finally, the government makes out really well when people choose to defer taxes and end up paying taxes on much higher total amounts later in life. Of course, this only applies to the few that are actually successful in their Wall Street approved plans and have income to pay tax on.
This is probably preaching to the choir, but Real Estate Investing combined with an EIUL and maybe some dividend producing individual stocks overcome the known issues that the popular strategies engender. Don’t be afraid to use the information in this blog to make the leap and get a real retirement strategy. I mean trying to retire on income derived from $100,000 in an retirement account doesn’t really sound like fun to me!