FedUpUSA

Archive for the ‘Retirement Accounts’ Category

The Great Recession is revealing some fundamental challenges in our economy.  One of those challenges revolves around the exceedingly expensive college degree and its ability to translate into employment.  As a percent many more American’s have a bachelor’s degree today than say in 1992 yet unemployment for college educated Americans is at modern record highs.  Another profound challenge facing American families is retirement savings (or lack thereof which is more likely the case).  Retirement is largely becoming a luxury that only a handful of families can count on.  As we look back at the last decade not all global stock markets were created equal and this is evident when we compare the US stock market to those abroad.  Finally we will examine what areas are seeing major price increases all the while overall inflation appears to be muted to average Americans.

College educated rise but less employment

Source:  BLS

In 1992 27 percent of those employed and 25 years of age or older had a bachelor’s degree or higher.  Today that figure is up to 36 percent.  However back in 1992 during another recessionary time those with bachelor’s degrees or higher had an unemployment rate of 3.5 percent while today it is up inching closer to 5.5 percent.

“In other words as a nation our employed workforce is more educated but it is also having a harder time gaining or maintaining employment.  At the same time college costs have far outpaced the overall inflation rate.”

This may seem counterintuitive because in terms of career aspiration a college degree is less likely today to secure you a job compared to 1992 but it is much more expensive in real terms.  So what are you really paying for?  Of course college is not merely a means to a job but a place where students develop into well rounded citizens.  Yet many for-profit institutions sell themselves as job factories and are all the willing to take federal financial aid without any statistics to back up their career placement rates.

What has occurred is a bubble in higher education.  Obviously becoming an educated citizen is important.  However we are facing a stratified market.  You have private institutions charging $50,000 a year or more catering to many of the financially well off in the country.  This group continues to get a solid education.  Next you have a public education system with very good schools but competition for admission is getting exponentially harder and students are dealing with bigger classes and more expensive tuition.  Finally you have the for-profit sector that merely operates to generate revenues by sucking in federal financial aid and not being accountable to their students and many operating only one step above diploma mills.

Retirement accounts largely a concern for top households

A BLS report done a few years ago showed that the median amount in retirement accounts for Americans was $2,000.  This makes sense given that half of Americans make $25,000 a year or less.  Many are looking at Social Security as their retirement account.  If you look at where the money is aggregated you will start to realize that retirement accounts are largely becoming a luxury for a small fragment of American society:

Keep in mind that only 15 percent of US households make more than $100,000 or more a year.  However 64 percent of all retirement assets are in the hands of the top 15 percent.  The median household income in the US is $50,000.  So we can even average out this amount here:

$1.04 trillion / 55 million US households =     $18,909

Now this may seem higher than the BLS figures but keep in mind this is because of the $20,000 to $49,999 cohort that holds the bulk of this amount.  In reality 1 out of 3 Americans have zero in savings.  Even here the data is skewed.  But think about the $18,909.  How long would that last you in retirement?  Say you draw down $1,000 per month and you are out of money within 18 months.

For many saving for retirement has become a harder and more trying exercise.  If we look at the domestic stock market we can see why.

Global stock market growth

Even after the amazing 90 percent stock market recovery from the 2009 lows the S&P 500 is still off by 11 percent from where it was in January of 2000.  In other words someone investing in boring and plain bank CDs actually performed better than the overall stock market for the decade.  The Wall Street mystique has been lost on many.  60 Minutes featured a story of a famed gambler that made millions betting on sports yet was taken for a ride with Wall Street.  In his own words, he did not trust Wall Street.  This coming from a professional gambler and hustler.  Wall Street has largely become one giant casino.

What is fascinating is markets that have benefitted from outsourcing such as India and China have boomed exponentially.  In exchange for cheap goods many Americans are now struggling to keep a hold on to what they once thought of as the middle class.  Why would a global multinational corporation want to pay someone in the US $10 an hour when they can pay someone overseas $10 per day for the same work?  That is the profound question many now have to wrestle with and no politician is willing to tackle.

Inflation is where?

The BLS CPI has shown virtually no movement over the last few years.  Much of this is due to the bursting of the housing market.  The BLS heavily weights housing as it should.  Most Americans spend the most on their housing costs each month.  Yet the housing crash has hidden some major inflation in certain items.  For example, oil is back up and you need only look at gas prices.  For those who shop the cost of food items has gone up last year.  Yet retailers have gotten creative with packaging so prices stay the same yet the amount you are receiving has gone down.

Take a look at the price of coffee, wheat, soybeans, orange juice, and other items over the last year.  The S&P 500 went up by 13.6 percent but this pales in comparison to other sectors.

What can we conclude from the above?  It is safe to say that there is a bubble in higher education.  The costs are outstripping the benefits in many cases depending on what schools you go to.  This is similar to the housing bubble.  Some homes should have never tripled in value yet many homes are nice and built with quality in good areas.  Others are not but when banks get involved you are likely to find speculation and gambling inflating costs.  Students need to be extremely careful in choosing their institution and not falling into too much debt.  Another conclusion you can draw is that the housing bust has hidden the inflation of many daily items.  The CPI is muted because of the implosion of the housing market and this covers up rising costs in other sectors.  For example college tuition, healthcare, gas, and food have all gone up significantly over the decade yet this hardly shows up while wages have gone stagnant or declined.  Ultimately American families have to be cognizant of these changes since they will impact their daily lives.

My Budget360

Many Americans live precariously close to the edge of financial insolvency flirting with economic disaster daily.  If you casually browse mainstream articles and watch any amount of television you would think that the US still had a vibrant and strong middle class.  When we pull back the covers on the current financial situation we realize that many Americans are merely getting by and many would like to live in some 1984 Orwellian fantasy world where suddenly things are back to financial equilibrium.  43 million Americans are depending on government food assistance to get by.  But many more millions are merely living paycheck to paycheck hidden in the cellar of the headlines.  1 out of 3 Americans has zero in any retirement account (not one slowly eroding dollar).  Half of Americans have $2,000 or less which puts them one month away from needing government assistance.  With the volatile job market and turbulent Wall Street middle class Americans are feeling the once prided stability being slowly washed away.  Let us examine how retirement is now becoming more of a fantasy for many Americans.

Many Americans especially young adults realize that saving large amounts of money is a key to a sustainable retirement:

Over 84 percent of 18 to 29 year olds surveyed feel they need at least $1 million saved up in order to stop working some day.  60 percent of those 30 and older feel that they will also need $1 million saved up.  Yet the actual figures are somewhat disturbing in contrast to the perceptions of many:

Source:  Census

The median retirement account for US households is $2,000.  This is why the vast majority of retirees depend on Social Security as their primary source of funds in old age even though Social Security was never designed to be a long term pension system.  You’ll notice that the average retirement account is closer to $50,000 a year but this is heavily skewed by the top 1 percent that keep most of their funds in stock wealth.

The reason retirement is slipping through the fingers of many like sand is the disjointed income equality in the country that has grown in the last decade.  If we look at income growth it has been heavily tilted at the top:

Source: Census, Chart: Wikipedia

There has been virtually no real income growth for most Americans.  The real significant wage growth over the last 50 years has occurred at the very top 10 percent of income earners in the country with this inequality accelerating in the last bubble decade.  What is more important is that 75 percent of Americans largely depend on a job as a primary source of income which seems rather obvious:

Source:  Federal Reserve

If you examine the chart closely, it is only the top 10 percent that really benefit from a buoyant and thriving stock market.  As we have mentioned earlier 1 out of 3 Americans has zero, nada, or zilch in their retirement account.  The movement of the stock market is like watching the score of a football game where the outcome means nothing to the individual.  Yet the problem is that Wall Street has taken the one item that was stable like a rock for Americans, housing and turned it into another commodity to be gambled and speculated against.

The share of income flowing to a smaller and smaller group of Americans is draining the life blood out of the middle class:

“From 1950 to 1989, nearly 40 years of data the top 1 percent earned roughly 7 to 8 percent of all the nationwide income.  Today it is inching closer to 20 percent, a figure resembling the massive income inequality seen during the Great Depression.”

Even within the top 1 percent the difference in incomes is striking:

This kind of income inequality is coming at the cost of the middle class.  Banks and the financial press would like you to believe that this isn’t the case but just look at how far your dollar is now going.  If you are fortunate to have a retirement account it is likely you don’t have the gambling devices of options, hedges, and other items that are largely new casino devices for Wall Street.  Most Americans are comfortable with income discrepancies but not at these levels and not when much of the gains are based on bets that hurt the overall economy.

The problem as many are now seeing is the financial sector is largely rent seeking by pilfering the future of many middle class Americans.  The banking system extracts wealth by devaluing the US dollar, by charging interest or fees on retail banking, and ultimately suckering many Americans to dump money into a stock market that is operated like a casino.  Washington Mutual, a once popular bank used to offer free checking for life.  JP Morgan Chase took over Washington Mutual in a government shotgun wedding.  Now, Chase is looking to extract $10 to $12 per month merely for having a checking account.  Of course they’ll waive this if you have $5,000 saved in a handful of their accounts.  Look above again.  1 out of 3 Americans have no savings so how will this be accomplished?

As we mentioned Social Security is largely becoming the retirement account default of many Americans.  Yet the growing number of beneficiaries is now putting strain on the system:

The above chart will only continue to show expansion.  Where will all this money come from?  We have a smaller workforce with the young that are already having a tough time saving any money in this economy.  Many of the good paying jobs of today require a college education and college has largely entered its own student loan bubble.  Many of the future middle class are merely trying to service their own massive debt even before they begin their careers.  To save that $1 million will become a daunting task moving forward.  Also, if the Federal Reserve has its way $1 million 30 or 40 years from now may not be much.

With 17 percent of Americans unemployed or underemployed many are simply looking for that next paycheck let alone planning for a retirement where they can sip margaritas in some picturesque beach location.  Wall Street has pilfered the pockets of the middle class through bailouts for their reckless gambling and incredible excess.  Many Americans now understand this yet the current political class is merely interested in protecting the established plutocracy by pillaging the American village.  Most Americans are becoming exhausted by both political parties and their pandering to Wall Street that provides a revolving door of money, jobs, and connections.

The younger generation is seeing their ability to grow their net worth diminishing:

This figure has only dropped even further in the last few years.  Retirement was once thought of as a place where one would reach a comfortable existence after many years of hard work.  Not an extravagant lifestyle but one in where a home was paid off and enough money came in for food and daily necessities.  But now with Wall Street turning housing into a giant commodity and stripping bear the employment base of the country; many are wondering if retirement is even an option especially when the stock market is at the same level as it was one decade ago.

Ultimately what needs to happen is to get money out of politics and to split up commercial and investment banking.  The answer is obvious but the plutocracy is relentless in keeping this game going as long as possible.  As this continues, retirement will continue to look more and more as a fantasy to millions of Americans.

My Budget360

Remember my discussion on Pensions?

And how you were going to get screwed?

Feel free to use the search bar and type in “Pension”, then have a read.

You’re hosed America.  Severely.  Far worse than you think.  And there’s nothing you can do about it.

I wish it wasn’t true, but it will be, because you refuse to stand up and put a stop to this crap.

France is the latest to seize pension assets.  They follow Hungary and Ireland.  There will be more.  And eventually, it will come here – and when it does, you will get hosed.

There is only one way to stop it. 

You, the American people, must demand that all of the bad loans that were made by banks be forced back onto them and defaulted.  At the same time the government must stand back and let the adjustment take place.

Yes, this will detonate the banks.  Yes, this will result in huge losses.  Yes, this will result in a short-term dislocation in the economy – a really, really bad one.  Yes, it will result in the collapse of home prices, bankruptcy of tens of millions of people and even more unemployment in the short term.

Again, government must do nothing more than providing emergency shelter and food to those who need it in this regard.

Government must also, at the same time, put an immediate stop to the offshoring monster through wage and environmental-parity tariffs.

If, as is often claimed, the reason for firms to offshore production is because people are willing to work harder or smarter than they are in the US, all fine and well.  But if they’re doing it because they have effective slave labor or can pollute with impunity, thereby having dramatically lower costs through poisoning the earth, that has to stop because those firms are then creating an economic imbalance that not only cannot be maintained but if not stopped will destroy our nation’s economy and funding mechanisms.

We all want certain services from our government.  We claim we want social services of various sorts, including social security, medicare, welfare and more.  But we have to be able to pay for those services, and we can’t when the tax base is destroyed by sending our labor overseas in search of slave-like conditions and the ability to poison the planet instead of keeping it, and the tax base it generates, here in this nation.

We have avoided the truth of this matter through borrowing for two decades.  We’re now coming up against our national credit card’s limit.  To avoid that The Fed, with the explicit consent of both Congress and President Obama, is intentionally trying to devalue the currency – that is, create “inflation.”

But the money is going overseas, and the inflation he’s creating is in China.  This is due to the fact that money is global and goes where it can earn the best return.  It doesn’t care what Bernanke wants or what our government wants – money is agnostic.

We can choose only between an orderly process and a disorderly one.  We can choose to force the banks to eat their own cooking along with citizens and take them into receivership or we will suffer a disorderly collapse.  That which is happening through Europe will come here.  We cannot avoid it.  We are only holding our place in line and acceleration is now taking place in these matters.

Remember that we started here with Bear Stearns and were told it was all ok after that.  Then we had Fannie and Freddie get into trouble, and we were told they were “stabilized” with Paulson’s Bazooka.  He lied – both they and Lehman collapsed at once.

The point is that he lied – he knew damn well what was going on and so did The Fed.  They all knew that Citi, for example, was writing crap paper for more than two years prior to it all blowing up and that 80% of their loans were bad by 2007. 

They tried to hide it and failed.

The same thing is happening in Europe right now.  The rolling “fails” will continue and intensify until the truth is recognized and the debt that cannot be paid is defaulted.  This path cannot be avoided irrespective of what people want or desire.

Our time to act in a responsible fashion as citizens of this nation is running out.  Three years ago I sent a fax to all 535 members of Congress urging them to put aside the cash necessary to feed, house and clothe at a basic level up to 1/4 of Americans – in closed military facilities and similar if necessary – for a year or more.  I’m talking about three hots and a cot, not “welfare payments” to sustain people in their iPhones and cable TV. 

Of course I was ignored and probably considered a nut, but in point of fact nothing has gotten better, and in fact has gotten worse, since I recognized this threat and warned of it and what must be the response.

If you’re currently dependent on pension funds of any sort, make other plans because given our government’s idiocy and refusal to stop sucking on the wang of people like Blankfein, Lewis and Strumpf you will not have a backstop from the government either. 

God helps those who help themselves, and on the path we’re on that’s all you’re going to have left.

I recently had a conversation with a retired neighbor, a former Navy vet who worked most of his life at a local grocery store.  I wouldn’t call him wealthy but he has his financial house in order; he paid off his home in the early 1990s, has no other debts, and lives well below his means.  His big source of income comes from Social Security.  We talked about the current economy and the strain we are facing.  It was a good conversation and ultimately the mathematical problems we are facing for the working and middle class become extremely obvious when confronted face to face.  We both conceded that government retirement programs will have problems in one or two decades (doesn’t help many who are still working).  The economic issues faced between the generations will cause many hard decisions down the road.

First, we should examine income levels in the U.S.:

Source:  Bankrate

The bulk of American households bring in $65,000 a year or less.  The current tax rate for FICA (Social Security and Medicare taxes) comes in at 7.65% with the remainder paid by the employer.  So the family making $65,000 a year is paying roughly $5,000 a year into FICA.  With the employer match, this figure comes out closer to $10,000 going into the system.  If we look at the current amount paid out to Social Security beneficiaries it is roughly the same per year:

The average monthly benefit paid out is $1,067.  Over 53 million Americans receive some form of Social Security benefits.  The working and middle class have had an implicit agreement with the government that if they work for many decades that in the end there will be some sort of safety net to protect them.  Yet the system was designed at a time when people died at earlier ages and we had many more workers than we had beneficiaries.  The math now is tipping in a very unfortunate direction:

As of today, nearly 19 percent of all Americans receive some form of Social Security.  Compare this to 1970 when only 12 percent of all Americans received some form of Social Security.  The above chart is merely going to grow even faster as many more baby boomers enter into retirement.  For those in the working to middle class the prospect of a secure retirement is looking more and more remote.  It would be one thing if people had the ability to trust in Wall Street and invest into the market.  Yet Wall Street with no real reform is largely a predator casino as we have seen with flash crashes and large hedge funds making billions of dollars betting on the failure of Americans.

The original Social Security Act was signed in back in 1935.  The initial design was to help the old, widows, and children of the poor to have at least some basic safety net.  It was never designed as a long-term retirement program.  Today, over 50% of those that receive Social Security benefits in retirement use it as their primary source of income.  With Americans living longer, the strain on the system is largely taken on by the working generations.

Here is an interesting chart showing the progressive growth of the tax over the century:

Initially, the amount taken out of a typical worker’s paycheck was 1 percent.  Today it is up to 7.65 percent (not factoring in the employer’s portion).  It is also the case that SS is capped at a certain income level so the wealthy actually stop paying above a certain level (as of 2010 this level is $106,800).  Going back to a previous chart, you see that nearly $57 billion was paid out in May alone.  The demographics of the system only point to larger and larger monthly payouts:

The above chart is similar to charts in Europe although not as extreme.  But we see a shift to more and older Americans.  By default, many of these people will start drawing more and more on the already strained Social Security system.  And younger workers in our current economy are facing a much deeper impact of the current recession.  Even before the collapse of the system, the young were already losing ground:

The median net worth of Americans from 25 to 34 has consistently dropped since 1985.  There was a big drop from 2000 to 2004 and I would imagine the trend has accelerated in the current recession.  Yet how were people able to continue buying more and more?  It was all fueled by access to debt.  It was largely a debtor mirage that kept the economy going in the last decade.  In fact, the median amount Americans have saved in a retirement account (those still working) is $2,000:

Source:  BLS

The fact that the mean is $50,000 tells us we have massive income disparities in the system and it also helps to point to the fact that most stock wealth is concentrated in the hands of a very few.  Another deceiving factor that was brought into the net worth equation was the net worth figure used housing values during a bubble to calculate net worth:

A giant part of net worth was pulled from housing equity that has now largely evaporated.  The fact that half of U.S. households only have $2,000 in retirement accounts tells us that many are close to a zero net worth after the housing bubble burst:

“(National Review) The macroeconomic consequences of this shift toward low-equity homeownership are visible in research from the Federal Reserve that examines the assets and liabilities of U.S. households. In the first quarter of 2001, U.S. households’ home equity stood at $7.7 trillion, or 61 percent of the value of all residential real estate. By the third quarter of 2008, it had declined to $7.6 trillion, even as outstanding mortgage debt increased by $5.6 trillion over the same period. By the first quarter of 2009, home equity was $1.35 trillion lower than it had been in 2001. Put another way: Despite the housing boom, the portion of residential real estate actually owned by households declined. This means that the increase in homeownership rates (and the subsequent rise in housing prices) was entirely debt-financed.”

In other words, say someone bought a home in 1998 for $100,000 and took out a $95,000 loan.  At purchase, they have a net worth of $5,000 (assume no other assets).  Fast forward to 2006 at the peak of the bubble and the home is now “worth” $250,000.  Seeing that they now have $155,000 in equity, they decide to pull out $75,000 pushing their total loan amount to close to $170,000.  The money is used to buy goods, take a vacation, and generally injected into the economy.  The housing bubble explodes and the home is now worth $150,000.  Yet they have $170,000 in outstanding loans.  This family went from having a $155,000 in equity (net worth) to suddenly going to a negative equity position of $20,000.  Today, one out of three U.S. homes with a mortgage is underwater.  This is why actual wealth is a better measure of financial well being than simply looking at home values especially in a bubble.

The higher unemployment for younger generations is making it harder to put more money into the Social Security money funnel. The low savings from the working generations tells us that many simply cannot save given the current economy.  Ironically, this means that many more will be dependent on government programs.  The calculus is troubling.  There are no easy answers to this.  A few of them include raising the cap to tax higher incomes or cutting benefits.  Seeing how powerful groups like the AARP are, it is doubtful benefits will be cut.

As I think back on the conversation with my neighbor that has served our country proudly in combat, how can you begrudge him?  He is living modestly, paid off his house, and let us be honest, $1,100 a month isn’t exactly Donald Trump territory.  Yet as I go out to work with millions of others, we wonder how things will be in one, two, or even three generations.  Having a paid off home and no debt actually sounds like the apex of a good retirement given our current financial predicament.

MyBudget 360

Many Americans are likely to run out of money in retirement. Almost half (47 percent) of early baby boomers currently ages 56 to 62 are at risk of outliving their retirement savings, according to a new Employee Benefit Research Institute study. Even among late boomers ages 46 to 55 and generation Xers ages 36 to 45, who still have plenty of time to save for retirement, 43 percent and 45 percent respectively are at risk of not having enough money to pay for basic retirement expenses.

[See 10 Best Affordable Mountain Towns for Retirement.]

Predictably, households with the lowest third of pre-retirement income are the most at risk of falling short in retirement (70 percent). But there’s also a significant possibility that middle income workers (42 percent) and even the highest earners (23 percent) will lack sufficient resources to fund their retirement.

Retirement income was estimated in the study by taking into account Social Security, 401(k) and IRA balances, traditional pension and annuity payments, and net home equity. A worker is considered to run short of money if the sum from those sources is not enough to pay for basic living expenses, health insurance premiums and out-of-pocket costs, and nursing home and home health care charges until the point they are picked up by Medicaid. Workers are assumed to retire at age 65 and immediately begin to withdraw money from their retirement accounts to pay for expenses that exceed income from Social Security and traditional pensions if they have one.

[See The 10 Most Common Retirement Benefits.]

Surprisingly, retirement preparedness has actually increased slightly since this analysis was last conducted in 2003. Well over half (59 percent) of early baby boomers were determined to be unprepared in 2003 compared to 47 percent this year. And 80 percent of the lowest income households were projected to outlive their savings in 2003, which dropped to 70 percent this year. “This is likely due to the impact of switching to automatic enrollment 401(k) plans while the worker is young enough to benefit from the new plan design for several years prior to retirement,” write EBRI research director Jack VanDerhei and senior research associate Craig Copeland.

[See 10 Things Retirees are Doing Without.]

The Pension Protection Act of 2006 made it easier for companies to automatically enroll workers in retirement accounts, which increased the number of people participating in 401(k) plans. Workers with access to a retirement plan at work are significantly less likely to be at risk of running out of money in retirement. For example, among generation Xers with a 401(k) plan, 20 percent have a high probability of outliving their savings. Workers the same age who who don’t have access to a retirement account at work have a 60 percent chance of not being able to retire comfortably.

USNews and World Report