Retirement preparedness drops as U.S. wealth destroyed

The recent economic crisis destroyed nearly two decades of Americans' wealth, according to a recently released Federal Reserve report. Middle-class families were hit hardest by this decline.

The median net worth of families fell by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010, the Fed found in its triennial Survey of Consumer Finance (SCF). That leaves Americans at roughly the same level they were at in 1992.

It wasn't just wealth that dropped. The Fed also found that income had fallen as well. Median family income in 2010 was down by 7.7 percent from its 2007 level and 6.3 percent from its level a decade ago. According to The New York Times, the collapse of the housing market directly accounted for three-quarters of the loss.

Also of note, given the aging baby boomer population, is the report's data concerning Americans' preparedness for retirement. The Fed found negative indicators for nearly all the demographic groups it examined:

• From 2007 to 2010, the fraction of families with personally established individual retirement accounts or job-based 401(k) accounts dropped 2.6 percentage points to 50.4 percent. This decrease offset most of the growth from the previous three years.
• Minorities were especially hard-hit, with the percentage of non-white families possessing retirement accounts falling from 39.5 percent in 2007 to 34.4 in 2010 (see Table 1).
• Noticeable declines in ownership also took place among families in the middle-income, middle-wealth and middle-age groups (See Table 2). The Fed noted that, for these groups, retirement accounts had been growing in importance as a supplement to Social Security and other types of retirement income. The decrease in ownership of these accounts over the past three years could be a bad sign for retirement preparedness.
• Median holdings in retirement accounts fell by 6.6 percent over the 2007-2010 period as well, in a reversal of a positive trend from the previous decade. As with ownership rates, families in the middle-income, middle-wealth and middle-age groups were hit the hardest.

Two common and often important types of retirement plans not included in the Fed's analysis include Social Security and employer-sponsored defined-benefit plans. Future income from these sources cannot be translated directly into a current value. In spite of this, the report does contain information for family heads and their spouse or partner regarding access to some sort of defined benefit plan. In 2010, 55.1 percent of families possessed rights to some type of plan other than Social Security. This figure represents a drop from the 57.7 percent level in 2007.

When asked what the most important reason for saving money was, a plurality of respondents in the Fed's study gave saving for a rainy day as their top reason. The next most frequently reported motivation was retirement related. It was the first time since at least 1998 that saving for a rainy day was more likely to be reported than saving for retirement.

The share of families saving anything over the previous year dropped to 52 percent in 2010 from 56.4 percent in 2007. According to The New York Times, other government statistics show that total savings have increased since 2007, suggesting that a smaller group of families is saving more money, while a growing number manage to save nothing.

Table 1 Retirement asset ownership by race

Table 2 Retirement asset ownership by household

– Alec Arellano