Economic Update: Household Net Worth, Inflation & Retirement

Economic Update: Household Net Worth, Inflation & Retirement
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The Federal Reserve recently released the Flow of Funds (Z.1) data for the third quarter of 2021.

Among the many things contained within the report, the Fed revealed that U.S. household (and non-profit group) net worth rose by $2.3 trillion in Q3 to a total of $144.7 trillion, a 1.7 percent quarter-over-quarter jump and a new all-time high.

Compared to this same period last year total net worth surged by 17.7 percent in Q3, down slightly from the previous quarter’s pace but still the 4th double-digit gain in a row and a big rebound after nearly grinding to a halt in early 2020. The third quarter’s gain was in part driven by real estate, which expanded by $1.4 trillion as residential real estate, the biggest asset for many Americans, benefited from home values continuing to appreciate at an accelerating rate.

The value of directly and indirectly held corporate equities, on the other hand, actually fell by $0.3 trillion last quarter, the first such decrease since Q1 2020 but in line with what one would expect considering that stocks were generally under a lot of pressure in the latter part of Q3. Despite the small decline, the equity share as a percentage of total household assets remained above pre-pandemic levels, signaling that more Americans are participating in the recovery bull market and are therefore likely little-phased by recent volatility. Moreover, both home values and the S&P 500 are up markedly Q4-to-date, so yet another solid increase in household net worth can be expected when the next Z.1 report is released in early 2022.

Worrying about short-term changes in stock valuations, though, is often unproductive because real wealth creation typically occurs over a much longer time horizon since this allows investors to therefore benefit from decades of growth, via diversified exposure to stocks, and capitalize on the resiliency of the market. One of the best ways to participate is through the use of a 401(k) retirement plan, which provides a variety of tax advantages and in many cases can be augmented by an employer’s matching contributions. Moreover, consistent participation in such a plan, especially when combined with dollar-cost averaging and regularly working with a professional financial advisor, can help investors navigate volatile markets and in some cases even turn large drawdowns into opportunities.

Perhaps more importantly, the sooner one can start saving and investing for retirement the better. This is evidenced by again referring to a J.P. Morgan analysis which estimated that a hypothetical 25-year-old with an income of $50,000 will need to set aside 9 percent of his or her annual pay every year in order to be financially prepared for retirement. The required savings rate jumps to 20 percent if the person waits until age 40 to start setting money aside, and 41 percent if procrastination continues until age 50. For higher income individuals even greater percentages of their income will need to be saved each year if they intend to maintain a retirement lifestyle equivalent to when they were working.

What To Watch This Week:

Monday

  • Nothing significant scheduled

Tuesday

  • FOMC Meeting Begins
  • NFIB Small Business Optimism Index 6:00 AM ET
  • PPI-Final Demand 8:30 AM ET

Wednesday

  • 3-Yr Note Settlement
  • 10-Yr Note Settlement
  • 30-Yr Bond Settlement
  • MBA Mortgage Applications 7:00 AM ET
  • Retail Sales 8:30 AM ET
  • Empire State Manufacturing Index 8:30 AM ET
  • Import and Export Prices 8:30 AM ET
  • Business Inventories 10:00 AM ET
  • Housing Market Index 10:00 AM ET
  • Atlanta Fed Business Inflation Expectations 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • FOMC Announcement 2:00 PM ET
  • Fed Chair Press Conference 2:30 PM ET

Thursday

  • Housing Starts and Permits 8:30 AM ET
  • Jobless Claims 8:30 AM ET
  • Philadelphia Fed Manufacturing Index 8:30 AM ET
  • Industrial Production 9:15 AM ET
  • PMI Composite Flash 9:45 AM ET
  • EIA Natural Gas Report 10:30 AM ET
  • 5-Yr TIPS Announcement 11:00 AM ET
  • 20-Yr Bond Announcement 11:00 AM ET
  • Kansas City Fed Manufacturing Index 11:00 AM ET
  • Fed Balance Sheet 4:30 PM ET

Friday

  • Quadruple Witching
  • Baker Hughes Rig Count 1:00 PM ET

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