The comprehensive guide on why you will never retire living the way you do: Examining the typical $50,000 household budget and why most Americans have nothing to very little saved for retirement.
We are facing an impending retirement crisis of epic proportions. The math is tough to look at. We have a growing population of aging baby boomers hitting retirement age with weak investment portfolios. Many will face increased healthcare costs since most of healthcare spending tends to hit in old age. Many older Americans are finding it tougher to retire and this also plugs up the pipeline for younger workers to move up through the employment channels. Many young Americans are confined to a new low-wage economy where pensions are extinct, benefits are lacking, and wages are far behind that of their parents even after adjusting for the corrosive power of inflation. The idea of retirement is actually a modern one. For most of our civilized history the only people that had time for fun and leisure were the top one percent of society. Life in other words was short and brutish for most of us. The US of course was the first nation to have a large and powerful middle class but this only came about after World War II. We are now trending back to the more historical norm of massive inequality for the bulk of the population. If nothing is done to reverse this trend, we will simply revert to how things were and the notion of retirement is going to disappear along with pensions. Most Americans still believe retirement is in the cards but their saving habits show a completely different future.
The Fed is channeling higher interest rates: Fed Committee participants anticipating higher rates and inflation already permeating throughout economy.
A market addicted to low interest rates is about to get a shock. Today our debt addicted system is accustomed to central banks providing all sorts of easy money. The market is awash with easy credit and inflation is rearing its funky head in all sorts of segments of the economy. Low interest rates have provided a sort of financial buffer for big banks and Wall Street to gain their footing after the global debt crisis beat down. Yet the Federal Reserve, the most powerful central bank in the world is now channeling higher rates in the near future. Fed Committee participants are already expecting higher rates for 2014 with most expecting higher rates by 2015. The Fed is going to have a tough time turning around this low interest rate ship since the market is now addicted to low rates. The Fed has to maintain its credibility and will need to act. The market is like a jilted lover hoping her partner will change and giving multiple second chances. Yet the Fed is now drowning with a $4 trillion balance sheet and Wall Street has developed a taste for single family homes pushing out regular families trying to buy a home to live in. What will higher interest rates do to this market?
How many Americans live paycheck to paycheck? A nation living precariously close to the financial edge.
The fuel that drives our economy is spending. There are few nations that rival our ability to spend. We spend with the gusto of a shop-a-holic. The assumption is that we simply have the money lying around to spend at this level. That is simply not the case since most Americans are flat broke by most standard definitions. For example, I was reading through the recent Money magazine and found that 55 percent of households making $100,000 a year or less are living paycheck to paycheck. This is the bulk of our entire nation. The median household income in the US is $50,000. This was from the most recent survey conducted this month! The economic recovery is now going into its fifth year yet Americans are no closer to planning for a stable retirement. Most Americans are not adequately planning and preparing for retirement. In fact, a retirement train wreck is barreling down on us. If 55 percent of households are living paycheck to paycheck, then stashing money away for the far away future is probably not on their immediate radar. We have become a nation that is precariously living on the financial edge.
Inflation is all around us if you know where to look: Spiking food costs, rising home prices and rents, and more expensive energy.
Inflation is accepted as a normal part of our economy similar to how we take it for granted that the sky is blue. It is close to a religion where people simply believe that inflation is part of the economic fabric of our nation. Yet inflation with no subsequent rise in wages is tantamount to a loss in living standards like a lumberjack slowly chopping away at a big pine tree. Inflation is a slow process and erodes purchasing power through a variety of avenues. We sometimes need to step out one generation to see how massive the changes are in the system. Even today inflation is hitting the pocketbooks of most Americans. First, inflation adjusted wages are simply not keeping up. You spend more at the grocery store and get the same or even less amount of goods. Sending your kids to college? More of your money is being allocated to this purchase compared to the previous generation. Housing? The large push of investors in the market has caused housing prices and rents to go up. What this means for most Americans is that more income is being siphoned away into housing. All of these are very tangible impacts of inflation so why is it that central banking policy is practically ignoring all forms of this erosion of living standards to continue monetary easing?
Do you remember what you had for lunch yesterday? Probably. What about two weeks ago? Probably not. Our mind isn’t designed on remembering every single detail of every single event but has adapted itself into remembering important events. Our brain is designed to look forward and for the most part is resilient. This is why the stock market rally starting in 2009 has washed away the memories of the market crashing down for many people. This also gives us a financial blind spot. The stock market has had a nice run since 2009 rising 168 percent as measured by the S&P 500. Many of the reasons for the crash were never fully addressed including too big to fail, debt strapped consumers, and a national debt that is getting to a level that is simply unsupportable. This market rally has occurred under the guise of favorable policies to the banking system. The Fed has punished savers and has created massive incentives for large pools of money to flood into every corner of the economy including the real estate sector. This has crowded out many regular households. Yet the stock market is turning and a modest correction is coming over the horizon. I have seen no articles that give a clear reason as to why the stock market should be up 168 percent in five years despite the underlying weakness in the economy.
Goodbye American middle class: New report reveals that 62 percent of Americans earn $20 or less per hour. Household income stuck in neutral for a generation.
The latest figures from the Bureau of Labor and Statistics (BLS) reveals that 62 percent of Americans earn $20 or less per hour. And this only examines those that actually have a job. Most of the new jobs added since the Great Recession ended have come in the low-wage segment of our economy which seems to be adding the bulk of employment. These are certainly interesting times that we live in. The US has close to 130 million jobs. 18 million jobs pay less than $10 an hour and 63 million pay between $10 and $20. These two segments makeup 81 million jobs so it is understandable why the two income household is more of a necessity rather than a luxury. The median household income in the US is roughly $50,000 per year. Adjusting for inflation income is back to levels last seen in the 1980s. Americans feel poorer because their purchasing power has been eroded by inflation and also the swarm of lower paying jobs that now dominate the market. The US middle class is shrinking and to ignore this is to ignore the actual facts.
Why you should fear inflation: The CPI understates the true nature of inflation. BLS only allocates less than 2 percent to tuition in CPI. Missing big on the biggest expense in housing.
Some people believe that inflation is simply a part of the normal economy like seeing the sunrise every day. Over time prices will rise on everything, or so the argument goes. I’m not sure if most dig into the question any deeper and question the nature of prices rising. If we look at inflation over generations the dramatic impact is clearly seen. If we see a reasonable rise in wages that accompanies higher prices then things typically even out and the public goes on with daily life. However, what we have seen for more than a decade is that wages are simply not keeping up with the overall change in prices. The middle class is disappearing because purchasing power is getting weaker. Sure, starting in the last two decades people went on a debt binge and this masked some of the loss in purchasing power but debt needs to be paid back. The loss of good paying jobs is a trend that continues and higher prices in housing, medical care, and college tuition continues to eat into the money Americans currently have. You feel poorer because your dollar is getting eaten away by inflation. The BLS tries to measure inflation by looking at a basket of goods in their CPI but misses on weighting some major components accurately. For example, it radically understates college tuition and housing costs. Inflation matters more than some people think.