What the Federal Reserve Survey of Household Finances Tells Us About Personal Finance? June 11, 2009Posted by shaferfinancial in Finance, Uncategorized.
Tags: How do we invest, How prepared are we for retirement, What our household finances look like
As regular readers understand I like to use actual evidence [data] to flesh out my ideas on personal finance. The best report on the financial status of citizens in the USA is the Federal Reserve’s Household Finance report that comes out every 3 years. The latest edition has come out. This reports on household finance numbers at the end of 2007. I will note that many of these numbers will be significantly lower here in 2009 because of the stock market and real estate market devaluations.
My assumptions include that the datum reported are the result of the financial strategies employed by us and that the majority employ the most common strategies.
Median income remains unchanged from the 2004 study. But I am more interested in the wealth numbers although there is interdependence between income and wealth. The median wealth increased 17% over the 2004 study. However, the study did estimate the amount of loss that would have come in 2008 and it was ironically the same 17%. This and other data tells us that the overall gain in net worth is mostly from personal real estate and stock mutual funds [either inside a 401K or stand alone accounts]. But it also tells us that the amount of debt compared to net worth remains consistent. Interestingly, the under 35 age group saw a robust decline in net worth while the over 75 age group saw large increases! This is probably because of the over 75 age groups stock ownership. For the top 10% of net worth the median amount was $773K. For the group from 75%-89% the median value was $215K. To enter the top 10% of net worth you need a value of about $400K. The median net worth for all families with any assets is $28.8K.
The median amount of funds in retirement accounts for all families rose to $34,600. The median amount in stocks was $17,900 versus $15,900 in pooled accounts [mostly mutual funds]. Over the last 10 years pooled accounts has been rapidly reaching the level of individual stock ownership demonstrating the increased popularity of mutual funds [and forced ownership in 401ks]. Cash value life insurance after dropping significantly in the 1998 , 2001 and 2004 studies rose to $8,000 in the current study. This again points out that the most popular strategies are being used by the vast majority. 23% of families own cash value life insurance, a declining number for the past 20 years. 56% have pooled investment funds [mostly mutual funds] for comparison sake. The vast majority of those having pooled funds hold them in retirement accounts. Only 18% of families have any direct stock holdings. Those with either direct stock holding or indirect stock holdings [mutual funds] have 53% of their financial assets in their stock holdings. However, that is skewed because the top 10% have large percentage of stock [not mutual funds] holdings.
In the 55-64 age group, the group on the verge of retirement, the median amount of funds in an retirement account is $98,000 [39% does not have a retirement account and is not averaged in to these numbers] with a total of $112,000 in pooled investment accounts. So although this has improved since the last survey it stills points out that this group is far from prepared for retirement. This group will be the first group in 2 generations to have over half retire without a defined benefit pension.
Median home equity value dropped to $48,000 and represents about 32% of the net worth. But when the top 10% of income earners are subtracted, the percentage moves up to 45%. So it is safe to say that for most folks the largest percentage of their net worth is in their personal homes. But remember this data comes from the end of 2007 before the major drop in real estate value.
Overall debt dropped, including mortgage debt on primary residences. The leverage ratio [compares total value of all debt to total value of all assets] dropped slightly from the previous survey and remains at approximately the same level as in 1998. Incidentally the median credit card balance for those with a balance was $3,000 with 40% paying off their credit cards at the end of each month. So much for all those folks arguing families have taken on significantly more debt over the last few years!
Finally, I quote directly from the report on cash value life insurance.
“Ownership of cash value life insurance is broadly spread across demographic groups, with a tendency toward increasing rates among families with higher levels of income and net worth and those with older family heads.”
We can give you a brief summary:
In general, their is little change in the preparation for retirement among Americans. As a group we are not particularly well prepared. Those with defined benefit pensions will do fine as long as the pension remains viable [many pensions are not and are going bankrupt!]. Mutual fund investment continues to increase, which is directly attributable to the movement to 401K style retirement plans. Although the popularity of using mutual funds is increasing, the value of individual mutual funds is very small peaking at $98K for the 55-64 age group with a median amount for all those having a pooled investment at $56,000. There is little movement in our overall debt compared to our assets. In short, generally we are continuing to behave financially the same way we behaved in the previous generation. That is the largest category for our wealth is home equity, the preferred strategy for investing is either direct or indirect stock ownership, and we remain within reasonable debt ratios.
Next post will be my interpretation of what the data means!