Poor Financial Health of the Average American

Here are some thoughts from the book The Net Worth Workout: A Powerful Program for a Lifetime of Financial Fitness (see my rating for details) on the poor financial health of the average American:

The average U.S. citizen works 44 years, then retires with a $46,000 net worth, excluding home equity. That represents just $1,000 for every year worked -- $83 for every month! Meanwhile, if such a person had invested $1,000 a year in the S&P 500 for fotry-four years, at age sixty-five, he would have $652,640! Ask yourself, What happened to that $600,000-plus of "missing" net worth?

I'll tell you what happened: new cars every few years, a house they can't afford, big screen TVs, vacations, present-filled Christmases, full cable packages, memberships to various clubs, etc. In short, people spend a lot of money on "wants" that many view as "needs."

Now I'm not saying that people shouldn't enjoy life, but they also have to make choices. Yet many people simply don't limit their choices (much) -- they see something they want, and they get it. Can't afford it? No problem, just borrow for it.

Becoming wealthy isn't that hard. In fact, it's rather easy. Want some examples? Check out these posts:

• How to Get Rich in Three Easy Steps

• The 10 Best Money Moves You Can Make

Comments

[Deyl]

I agree, i tend to get very annoyed when people wish and wonder why they're not rich when they're not willing to make the sacrifices or decisions that would lead to that result. well said!

[Tag]

Why do you think there are so few stories of people that are doing things right? I'm thinking it is merely alot harder to find these people and interview them. "The Millionaire Next Door" is a great example, but is getting dated. Would love to see an updated version of that book.

Tag

[Duane Gran]

What I want to know is how they are getting by with just 44k in assets! That is a dismal state of affairs.

[MrAtoZ]

RE the asset question, remember the $44k figure excludes home equity, which for many retired people, is significant, particularly given the past 5 years of real estate mania. Also, some folks (such as my 76 year old mother) have a pension plus SS, and they live in places where the cost of living is not above their fixed income, plus the revenue from modest IRAs and other investments that are liquidated.
A final point is that many of these Greatest and Silent Generation types were not part of the explosion in the investor class of the past 20 years or so...401Ks and IRAs are fairly recent developments for people born prior to and during the Depression. Not many people in their 60s today were investors, even in mutual funds, back in the 1950s and 60s.

[EMF]

To AtoZ: What is the the equity in your home really worth? To get it you have to sell your home, and then where do you live? Well, there are reverse mortgages, but after the fees and interest you'll only get a fraction of your equity.

With respect to the quoted article, in 1962 (44 years ago) the average wage was $4291/year. A recent retiree would have been in their 20's in 1962 and probably earning less than average wage. To contribute $1000 to a nest egg would likely have required a contribution of more than 25% of pretax income. More recently $1000 would have been only a small percentage of an average wage. So the $600,000 figure is bogus.

I have an article on my blog (click the EMF link below) that discusses a more realistic savings scenario and includes a link to a spreadsheet that shows actual figures.

In the end, I do agree with the premise that a $44k nest egg is too low and that it should be possible to retire with much more. It's the method that I criticize.

[Bamadad]

In support of MrAtoZ (right on)

"if such a person had invested $1,000 a year in the S&P 500 for fotry-four years, at age sixty-five, he would have $652,640! Ask yourself, What happened to that $600,000-plus of "missing" net worth?"

Minimum wage was $1.00 an hour in 1960, times 2000 hours of work a year if you were fully employed equals $2000 a year. Double that to get the average wage based on the US Census stats to $4000.

Gee, our Fathers only had to save 25% of their income and find a way to invest that all in the S&P, which I wonder how expensive was to do then. I guess 4% of the amount invested, even more in the typical load fund back then. I don't even know if there was an S&P index fund. Twisted use of stats.

[bamadad]

and in support of EMF. (the "posted by" line threw me off) Thanks EMF for the post on your blog.

[MrAtoZ]

I'm not arguing that a $44k nest egg is sufficient. My point is that the way that previous generations accumulated wealth was different than today (again, tax-favored, stock-focused retirement vehicles weren't even in existence during the prime earning years of the pre-Baby Boom retirees). Also, pensions for such workers were more common, and perhaps the cash value of those was not included in the $44k figure. If not, it should have been, because as we all know, the shift from defined-benefit to defined-contribution retirement plans has been a major change in the economics of seniors.