Conversations about retirement readiness usually focus on portfolios–how much you’re saving, your investment mix, and whether you’ll accumulate assets sufficient to last a lifetime.
But those conversations are missing a bigger-picture question about retirement readiness: How are household balance sheets shaping up as families approach retirement?
Research by the AARP Public Policy Institute provides answers. AARP researchers used highly authoritative Federal Reserve household survey data to create balance sheets showing average amounts of assets, debt, and net worth for the American middle class for young, middle-age, and older households.
The study quantifies what many of us know intuitively: The balance sheets of pre-retired Americans are a mess. Middle-class Americans close to retirement (50-64) experienced a 22.4% drop in net worth during the Great Recession (2007-10). The only cohort that saw a larger decline was the 25-49 age group (44.9%), but they also have more years to rebuild wealth before retirement.
On the assets side of the ledger, the stock market isn’t the key culprit here. The market is up strongly over the period studied (1989-2010). But wage growth has been stagnant. The economy went through three recessions, damaging employment security. And the value of nonfinancial assets, chiefly real estate, has fallen sharply–the hangover of the housing bubble and bust. Meanwhile, on the liabilities side of the ledger, debt has swelled.
The research is based on what is widely regarded as a gold standard of economic surveys–the Federal Reserve Survey of Consumer Finances, or SCF. The SCF is conducted every three years and gathers detailed information on the finances of U.S. families. It is based on in-depth interviews with roughly 6,500 families across all economic segments–and participants are interviewed again for subsequent studies in order to measure trends with accuracy.
The AARP study relies on the most recent Federal Reserve survey data from 2010, and balance sheets likely have recovered some since then as the economy–and the housing market in particular–have started bouncing back.
AARP researchers used the SCF data to create middle-class balance sheets for younger households (ages 25-49); pre-retirement households (ages 50-64); recent retirees (ages 65-74); and older retirees (ages 75+). The study examined what’s been happening just since the recession (2007-10) as well as longer-term trends (1989-2010). “Middle class” is defined as families with income between the 20th and 80th percentiles–in 2010, ranging from $20,330 to $94,535).
Here are some of the highlights–or perhaps lowlights–of the AARP research.
Click for more . . .
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