The rise in wealth and a decline in financial security

• Financial conditions have become increasingly complex and uncertain even as the economy and financial markets have gained in recent years.

• A lack of financial preparedness, fewer savings opportunities for a younger generation and retirement insecurity are just a few reasons why a growing number of people find it harder to get ahead in life financially.

• Nevertheless, we believe that the development of a customized personal financial playbook can help households navigate coming complexities and uncertainties and ultimately get ahead in life financially.

Increased economic and financial market complexities and uncertainties come at a time when more Americans report that it is simply harder to get ahead in life financially.  To be sure, even as the economy has notably expanded over the past decade, more jobs have been created and households possess greater overall wealth, a government report suggests that a large percentage of Americans remain financially fragile[1].

Economic insecurity and financial shocks

To this point, data indicate that many Americans lack the financial resources necessary to weather unexpected life events like a job loss[2]. Indeed, the report finds that more than half the individuals polled in a 2019 survey have less than $1,000 in savings.  That’s equivalent to the national monthly average rent for a 1-bedroom apartment and comes at a time when it takes more than 45 days for an unemployed person to find new work.

To be sure, simply weathering an unexpected life transition, like a job loss, is emotionally and financially disruptive for many American households.  And when the unexpected does strike for those without an adequate emergency savings plan, as it inevitably does, money held away for retirement or other long-term savings goals are among the first to be tapped, undermining many household’s already underfunded savings and retirement goals.

[1] Consumer Financial Protection Bureau, “Financial Well-Being in America”, September 2017

[2] GoBankingRates, “Survey of Household Saving”, September 2017

Figure 1: Most Americans surveyed have less than $1,000 saved

A lost generation

Other reports suggest that getting started on the right foot has become a financial challenge for a younger generation[3].  Certainly, the data show that the number of adults aged between 25 and 35 living at home with their parents is double the rate it was 50 years ago.  What’s more, fewer people in this demographic are participating in the labor market when compared to data from the past two decades.

This comes as recent college graduates report having a harder time finding meaningful, well-paying work and the amount of student loan debt has doubled to over $1.6 trillion in the post-Great Recession era.  Adding insult to injury, housing affordability is in decline, making traditional life transitions like purchasing a home more challenging for some would be first-time buyers.

To be sure, falling interest rates have made monthly mortgage payments more affordable on a relative basis.  Yet, the absolute rise in home values over the past decade means that first-time homebuyers will need to save more money for a bigger down payment and at the same time service a larger mortgage payment than in years past[4].

[3] Zillow.com, “More Than One in Five Millennials Still Live with Mom”, May 2019

[4] National Association of Realtors, Housing Affordability Index, October 2019

Figure 2: National home prices have surpassed historic levels

And while some fortunate individuals have been able to successfully transition into the job market, more challenges remain, particularly as individuals face many important choices related to balancing cash flows to maintain a certain quality of life today against saving for tomorrow’s life transitions like buying a home, educating a child and preparing for retirement at a time when wage growth has been stagnant.

Growing retirement insecurity

Retirement insecurity is also on the rise as more workers worry about self-funding retirement[5]. This comes as widening fiscal deficits have raised concerns among many savers about whether the U.S. government will have enough money to fund Social Security benefits in the future.

Indeed, a report from the Social Security Trustees shows that the combined value of the Social Security trust funds used to pay retirement and disability insurance will be depleted by 2035 if lawmakers do not act today[6]. Even more troubling, the number of people approaching full retirement age is swelling daily all the while political and economic uncertainties raise market volatility and increasingly jostle balances in self-funded retirement accounts.

To this point, many retirees recall the negative effects that financial market shocks of 2008-2009 had on market-based retirement savings plans.  At that time, some would-be retirees lacked a proper retirement distribution strategy as the Great Recession took hold and financial markets responded in kind.

When some financial assets, like stocks, experienced a drawdown of as much as 40%, mistimed withdrawals from retirement plans had a detrimental effect on the longevity of self-funded retirement plans.  That is, assets that had lost considerable value in some cases were sold off, locking in paper losses and substantially reducing the size of personal retirement savings.  As a result, some people today still find themselves working in their golden years, making up for savings lost during a period of heightened market volatility.

A lack of financial preparedness, fewer savings opportunities for a younger generation and retirement insecurity are just a few reasons why a growing number of people find it harder to get ahead in life financially.  And yet for those individuals who have been fortunate enough to overcome these obstacles, increasingly complex challenges await them as current developments suggest the financial environment is likely to become even more complex and uncertain in the coming years.

[5] Transamerica Center for Retirement Studies, “Compendium of Findings About American Workers”, June 2018

[6] Social Security Board of Trustees, “2019 Annual Report of the Board of Trustees of the OASDI Trust Funds”, April 2019

Figure 3: Social security reserves will be depleted by 2035

Nevertheless, we believe that the development of a customized personal financial playbook can help households navigate coming complexities and uncertainties and ultimately get ahead in life financially.

In our next post, we’ll look at some of the factors that are likely to increase financial uncertainties and complexities in the coming year. 

This post is an excerpt from our report, Getting Ahead Financially in 2020.  You can download this report in its entirety by visiting franklinmadisonadvisors.com.

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