Financial Planning, Retirement, Economy

Are Americans At Risk Of Living Rich And Retiring Poor?

7/26/16 8:00 AM

iStock_000005970521_Small.jpgAccording to the Federal Reserve Bank of Atlanta’s GDPNow forecasting model, real (inflation-adjusted) consumer spending in America is currently tracking at the strongest quarterly growth rate in over a decade. Evidence of this could be found earlier this month with the release of a much better than expected retail sales report.

The strong U.S. labor market is likely a big factor behind consumers’ increased willingness to spend because even though job creation has moderated somewhat as the economy approaches full-employment, businesses are still adding payrolls at a healthy enough clip to easily outpace population growth. Further, job openings in America remain near record levels, and other wage pressures are starting to build. Altogether this means that many Americans likely now have more confidence in their prospects for both finding a job and future earnings growth, thus explaining their apparent uptick in discretionary spending.

These encouraging economic developments also enable more Americans to improve their personal finances by paying down debt, and there are signs that this is going on in the economy right now as well. For example, the Federal Reserve’s July Beige Book noted steady improvement in consumer credit quality across the country, as well as broad declines in the number of loan delinquencies. The latest household debt and credit report from the New York Fed echoed such improvements, e.g. seriously delinquent credit card balances were down 52.1 percent in May compared to this same period last year. However, the Beige Book also showed signs of increased loan demand in all 12 Fed districts from mid-May through June.

That could mean that many consumers, after working so hard to reduce their financial liabilities, are responding to the recent improvements in their credit rating by taking on new debt. Americans are of course free to do what they want, and higher consumer spending and credit utilization can even be supportive of economic growth. Such behavior, though, can also mean that many people are missing out on a great opportunity to boost their savings. Indeed, maintaining a lower debt load and limiting discretionary purchases should together allow for more money to be regularly set aside and placed into some sort of saving account.

Unfortunately, a study by the Financial Industry Regulatory Authority (FINRA) found that only four in 10 surveyed U.S. adults said that they spent less than their income last year and had money left over to save. Similarly, research from Bankers Life found that just 37 percent of middle-income Baby Boomers are currently spending less than they take in, an alarmingly low figure given this group’s relative nearness to retirement. Twelve percent of surveyed middle-income Boomers even said that their outlays now exceed their earnings, and a majority (55 percent) of these respondents blamed “bills, debt, loans or other household expenses.”

Around half (53 percent) of all surveyed Boomers who have yet to retire reported being optimistic that they will have eliminated all of their debt-related obligations prior to retirement but only 23 percent of current retirees said that they are actually debt free.



Sources: FRBA, Wells Fargo, FRBG, FRBNY, Bankers Life Center for a Secure Retirement

Post author: Charles Couch