The Federal Reserve this month released the updated Flow of Funds data for the first quarter of 2018. Among the many things contained within the report, the Fed revealed that U.S. household (and non-profit group) net worth rose by $1.0 trillion in Q1 to a total of $100.8 trillion, a 1.0 percent quarter-over-quarter increase and a new all-time high. Both household net worth as a percent of U.S. gross domestic product (GDP) and real (inflation-adjusted) net worth per capita also climbed to record levels in the first quarter.
Most of the strength in Q1 was due to real estate, which expanded by $0.5 trillion as residential real estate, the biggest asset for most Americans, benefited from home values continuing to appreciate faster than the pace of general consumer inflation. Encouragingly, mortgage debt as a percent of GDP still ended Q1 at the best level in more than a decade. Compared to this same period last year, though, total household net worth lifted by 7.0 percent in Q1. That is above the average quarterly gain of the current business cycle but still the weakest pace of growth recorded since 2016.
The Q1 slowdown was largely due to a $0.4 trillion decline in the value of directly and indirectly held corporate equities (stocks and mutual funds), not surprising considering that the S&P 500 during the first three months of 2018 posted its largest quarterly decline in almost three years. On the bright side, the benchmark index has rebounded sharply in Q2, which together with the continued rise in home valuations suggest that household net worth has likely already hit another record high this quarter. More importantly, properly diversified exposure to stocks can over time help Americans accumulate significant wealth.
One of the best ways to participate in the market 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. Consistent participation in such a plan, combined with dollar-cost averaging, can help investors minimize holding period volatility and sometimes even turn large market drawdowns into opportunities. Further, the sooner one can start saving and investing for retirement the better, as evidenced by a recent J.P. Morgan analysis.
Specifically, 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. A more personalized assessment of what you should be currently setting aside for retirement is available by consulting with a financial advisor.
Sources: FRBG, J.P. Morgan
Post author: Charles Couch