This month the Federal Reserve released the Flow of Funds (Z.1) data for the first quarter of 2019. Among the many things contained within the report, the Fed revealed that U.S. household (and non-profit group) net worth rose by $4.69 trillion in Q1 to a total of $108.64 trillion, a 4.51 percent quarter-over-quarter jump and a new all-time high. Compared to this same period last year, total net worth lifted by 4.13 percent in Q1, a big rebound after nearly grinding to a halt in Q4 2018 but still slightly below the cycle average (6.46 percent).
Last quarter’s gain was in part driven by real estate, which expanded by $0.39 trillion as residential real estate, the biggest asset for many Americans, benefited from home values continuing to appreciate faster than general consumer inflation. An even larger driver of last quarter’s significant increase in net worth was the $3.23 trillion rise in the value of corporate equities, not surprising considering the benchmark S&P 500 index surged by 13.07 percent in Q1, the best quarterly gain since 2009. However, given the recent volatility in the stock market, equities are unlikely to provide the same quarterly boost to net worth in Q2 without a substantial rally over the next few weeks.
Real wealth creation, though, typically occurs over a much longer time horizon because investors can therefore benefit from decades of 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, 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.
More importantly, the sooner one can start saving and investing for retirement the better. This is evidenced by an earlier 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.
Sources: FRBG, Bloomberg, Pension Partners, J.P. Morgan
Post author: Charles Couch