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Retirement In America: A Rough Road To Travel

 November 09, 2012 10:48 AM


(By Mani) The severity of the 2008-2009 recession left household balance sheets deeply scarred. Households saw their net worth tumble while income fell outright. Consequently, many households fell into a financial hole, particularly those closest to retirement with the least amount of working years to recover their financial position.

To the extent that home prices recover from their depressed levels, financial positions should improve. Given the hit to households' financial positions, it makes sense that a higher share of seniors are working today than before the recession.

"However, should the 45-64 years old age cohort—the bulk of the baby boomers—choose to remain in the job market and maintain elevated savings rates in order to repair their battered balance sheets, then growth in consumer spending and, by extension, growth in the overall economy could remain lackluster for the foreseeable future," Wells Fargo economist Jay Bryson wrote in a note to clients.

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New data from the Federal Reserve's triennial Survey of Consumer Finances (SCF) provided a more thorough look at the financial position of households nearing retirement or already in retirement.

"We find that while both the pre-retirement and post-retirement households took hard hits to their balance sheets in the aftermath of the Great Recession, post-retirement households fared relatively better than their younger counterparts," Bryson noted.

The steep decline in net worth for pre-retirement households suggests that many families will face a higher hurdle to reach their retirement savings goals than they would have only a few years ago.

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The degree to which the financial positions of pre-retirement households can recover in the coming years will have ripple effects throughout the economy, particularly in terms of the future pace of consumer spending.

Median net worth for pre-retirement households reverted to its lowest level since the 1998 survey. Although net worth fell for both the 65+ and the 45-65 age cohorts between 2007 and 2010, the distribution of net worth is highly skewed toward wealthier households.

The financial positions of older Americans deteriorated noticeably during the Great Recession, and pre-retirement households fared worse than their retirement-age counterparts.

"Although net worth fell for both age groups between 2007 and 2010, younger households preparing for retirement suffered larger losses than households likely to already be in retirement," the economist said.

Moreover, the average value of real income for pre-retirement households dropped to its lowest level since 1998 while real income for the typical pre-retirement household (i.e., the median) fell back to levels last experienced in 1995.

"This retracement of real income will make it even more difficult for households to prepare for a comfortable retirement than prior to the Great Recession," Bryson said.

However, the good news is that recent data suggest that financial positions likely have improved since the last SCF was conducted in 2010. Many asset prices have risen, and real income is trending higher again, albeit slowly.

"To the extent that home prices recover from their depressed levels, financial positions should improve further," Bryson wrote.

That said, many older households, especially those nearing retirement, may not feel as comfortable about their retirement prospects as they did prior to the financial crisis.

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