This article was originally published on Franklin Wolfson's website. Part of his series on Retirement, you can read the entirety of the blog, here.
Are you approaching retirement? Do you have parents or relatives who are facing uncertain times as they reach the end of their careers and launch into their golden years?
While it's no longer a shock, the United States's economy is just not getting any better. And the middle class continues to bear the greatest burden of the nation's financial challenges. According to an analysis by the Pew Research Center, almost 90% of the major U.S. metropolitan areas it surveyed between 2000 and 2014 showed a decline in middle-class families. In some cases families have ascended into higher income levels while many others have descended into lower income levels. This study appears to corroborate a nationwide trend that’s been evident for the past thirty years or more.
What's causing the middle class to shrink? Take a look at the following 3 reasons behind this dip.
1. Wage growth has been relatively stagnant
Although nominal wages have been rising, inflation adjusted wages have been relatively stagnant.
This has a profound negative effect on a major portion of our society. For young adults, the cost to attend college and for senior citizens needing proper medical care costs keeps rising at a faster pace than wage growth. In the last ten years or so, medical care costs have risen faster than the Consumer Price Index and college tuition costs have increased at even a faster rate. These are ominous signs affecting both the young and the old.
This has a profound negative effect on a major portion of our society. For young adults, the cost to attend college and for senior citizens needing proper medical care costs keeps rising at a faster pace than wage growth. In the last ten years or so, medical care costs have risen faster than the Consumer Price Index and college tuition costs have increased at even a faster rate. These are ominous signs affecting both the young and the old.
2. Failure to Balance Income and Debt
The wide spread adoption of the use of debit and credit cards has made purchasing products and services much easier but high interest rates and an unbalanced income to debt ratio has made paying for those things more difficult. As a result, most Americans are carrying too much debt in relationship to their income, their ability to handle emergencies or their discipline in allocating funds for savings and investment to ensure a safe, secure and extended retirement.
According to the Survey of Consumer Finances, the debt burden of the average middle-class family in 2013 was more than 120% of annual household income. Although this is down from its peak of more than 140% in 2010, the amount is more than twice as much as it was just 25 years ago.
These high levels of debt are forcing middle class families to divert funds that should be saved for retirement to paying monthly debt payments instead. Families that don’t plan properly or fail to stick to their plan are destined to go from crises to crises until just one unforeseen or unplanned event becomes a financial catastrophe that affects the entire family.
According to the Survey of Consumer Finances, the debt burden of the average middle-class family in 2013 was more than 120% of annual household income. Although this is down from its peak of more than 140% in 2010, the amount is more than twice as much as it was just 25 years ago.
These high levels of debt are forcing middle class families to divert funds that should be saved for retirement to paying monthly debt payments instead. Families that don’t plan properly or fail to stick to their plan are destined to go from crises to crises until just one unforeseen or unplanned event becomes a financial catastrophe that affects the entire family.
3. Historically low interest rates
The Federal Reserve’s low interest-rate policy has been a boon for existing and new homeowners seeking to buy or refinance their homes and businesses that rely on access to cheap capital to expand their operations, hire new employees or develop new markets or finance other business opportunities.
As with so many things that sound good, some groups benefit while others may suffer even though the long-term effects for the nation as a whole may be positive.
There is no question that many middle-class families have benefited from low mortgage rates but with yields on CDs, savings accounts, checking accounts and U.S. Treasury bonds hovering around all-time lows, many middle-class families that counted on the guaranteed income of interest-bearing assets are suffering from shrinking incomes and reduced purchasing power.
As with so many things that sound good, some groups benefit while others may suffer even though the long-term effects for the nation as a whole may be positive.
There is no question that many middle-class families have benefited from low mortgage rates but with yields on CDs, savings accounts, checking accounts and U.S. Treasury bonds hovering around all-time lows, many middle-class families that counted on the guaranteed income of interest-bearing assets are suffering from shrinking incomes and reduced purchasing power.
Check out Franklin's article to read the remaining four reasons why the middle class is in trouble when it comes to saving and living through their retired years.
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