Many Americans are never going to retire.
On Tuesday, I laid out an argument for why most Americans cannot afford a payday loan. The main thrust of that blog focused on the "median" American household, which has about $100,000 in assets. But what about the majority of Americans are not median, and in particular, those individuals who fall onto the low side of the bell curve?
The low-income median is much lower. According to the 2007 Survey of Consumer Finances (pdf), the lowest quartile of American households had a median of $1,200 in net worth. That is the good news. The median is much
different than the mean. The average person in that quartile had a negative net worth.
The portrait that emerges is of a vast class of penniless households, and a dichomoty between haves and have-nots. Tenancy is a fairly good divider: only one in four renters has any kind of a retirement account, compared to a rate of sixty percent among homeowners. Among households in the bottom quartile of wealth, only one in seven has a retirement account. Many of these are unbanked. One in four has no transaction account of any kind.
Popular Notion of Savings
ING's well-conceived advertisements - "What's Your Number?" put some esprit d'corp to the task of savings. Those messages have a friendly feeling, with images of neighbors and co-workers walking around with numbers in balloons above their heads. But the numbers are usually high - $474,000, or $1,491,233.
If ING wanted to scare you, they would put up the real numbers.
Think about people in their late 50s and early 60s. These are people who should be putting the finishing touches on their nest egg. Many are, of course.But on the whole, there is a long way to go before people have any kind of independent means. Even in that age group, the median net wealth is only a bit above $100,000.
As much as anything, people have to recognize that they have a retirement problem before they can make an earnest effort to do anything about it. The Employee Benefit Research Institute (EBRI) has an interesting chart [pdf, pg. 4] to this effect. It says that the less a person has in savings, the more likely they are to have not thought about how much they will need for retirement. Only one in three people with fewer than $250,000 in assets has an idea of their financial needs, whereas 4 of every 5 people with more than $1.5 million in assets has a clear plan for where they are trying to end up after they are done working.
The results bear it out: having a plan makes a difference. The median household wealth for a family with any financial asset (not home equity or a vehicle) is $235,000.
But there is one inescapable conclusion. Frugality would make a difference. Going back to Monday, one important point was that people can get by if they spend very little. People with very little in the way of assets, save for a Social Security account, are not susceptible to the ups and downs of the financial markets. For them, the prospect is very simple: live on $1,000 per month, hope you don't get sick, and contemplate borrowing money from your kids if you have an emergency.
It is hard medicine. I'm writing about all of this, and at the same time, I drove to work in a nice car. I have a used Volvo - as would any consumer advocate - and it cost me more than $3,000. Our executive director has the willpower to do better. He drives a 1991 Saturn! Saying that, spending money on cars is probably just one of a number of things that we ought to be doing differently. You can't afford a payday loan if you are not a millionaire. You probably can't afford a new car, either.
A skeptic might say that this kind of advice would kill the consumer spending that drives our economy. True! But our consumer economy is driven by the availabilty of loads of consumer debt. There's a great new movie out - "Inside Job" that puts the problem in simple terms.
The end result won't be pretty. Seeing seniors bagging groceries and working at convenience stores is going to be all too common in the near future. Certainly, it will means that the politicians that have railed against pushing back retirememt for federal entitlement programs were flailing against reality. But it is also means that the consumer driven economy may be a economic system with a limited lifetime.
The unbanked are in the crosshairs of this problem. The prepaid cards that seem to be a beacon for their financial futures are going to be a very significant platform for the financial security of our workforce. We need products that can provide an anchor for savings. At the same time, that means that these cards need to be built without high-cost debt features. The payday advance product that was, until the OTS stepped in, appended to the MetaBank issued cards is a real threat.