I recently stumbled across a fascinating chart by Deutsche Bank highlighting that more families than ever before have ZERO or NEGATIVE non-home wealth. In other words, roughly 30% of households have no 401k, no IRA, no after-tax investment account, no private equity investments, no venture debt investments, no nothing beyond the value of their primary residence!
Check out the chart below.
If you have no investments outside of your primary residence, I’m not sure how you are ever going to be able to retire or reach Budget Financial Independence because Social Security alone is not enough to cover expenses after the age of 62.
I’m not even sure the average Social Security check of ~$1,200 a month is able to cover all your healthcare costs. Let’s say you were “fortunate” enough to have worked 40 years and paid maximum FICA tax each year. You’d still only be getting a maximum Social Security check of ~$2,700 a month in today’s dollars.
The reason why the 2008-2009 financial crisis was so severe was because the vast majority of Americans had the majority of their net worth locked up in their primary residence, and the chart above excludes the primary residence as part of one’s net worth. When the housing market crashed, so did the fortunes of the ~64% of Americans who owned their homes. Americans didn’t have enough cash or defensive bonds or even commodities to protect them from selling at fire sale prices.
What’s Going On With The Lack Of Outside Wealth?
Since breaching previous stock market highs at the end of 2012, the S&P 500 and the Dow Jones Industrial Average have marched to new highs each year. Further, real estate around the country has also improved dramatically. With so many asset classes doing well, why do a record number of Americans have no wealth outside their primary residence?
Here are some reasons I can think of.
* Runaway trains. After the economy started settling down in 2010, the typical American began thanking their lucky stars they were still solvent after the worst financial crisis in modern times. I cannot stress enough how shell shocked people were after experiencing so much wealth destruction in such a short time.
When you’re catching your breath, you’re not looking to aggressively invest in new assets. But starting in 2012, the stock market and real estate market really began to really take off. Meanwhile, the pace of appreciation for new assets like cryptocurrency rose faster than any asset class in history.
By the time Americans finally felt comfortable taking on more risk, all the investments we wanted to buy started giving us post traumatic stress because they’re at the same sky high valuations before the crisis. As a result, we couldn’t part with our cash. The trauma was just too recent.
2) Spend before you lose all your money again. After the financial crisis, a lot of people questioned the wisdom of saving and investing all those years given it was so easy to lose so much money. Distrust in the stock market grew to new heights as people decided to spend their money on things and experiences rather than invest for tomorrow.
Here’s a millennial survey done by Goldman Sachs in 2015 about their thoughts on the stock market. GS should have asked millennials whether they trusted GS! I’ve come across many 35 and under people in my time who are cashed up and all about YOLO.
3) Don’t know what to invest in. Despite TV, podcasts, books, and personal finance blogs, there is still a huge knowledge hole for how and where to invest one’s hard-earned savings. As a personal finance blogger, this makes me kind of sad because anybody who got on the “saving until it hurts” and investing train since I started this site in July 2009 would be much wealthier today. But as an online business owner who has two mouths to feed, this knowledge hole makes me extremely bullish about Financial Samurai’s future!
Of course, I can see a scenario where people finally gain the confidence and knowledge to invest only to see the stock market and real estate market start declining once again.The key is to at least have index exposure to various risk asset classes based on your risk tolerance.
Related: The Proper Asset Allocation of Stocks And Bonds By Age
4) Real wages haven’t kept up. We can’t assign blame for lack of saving and investing solely to fear and ignorance. Despite nominal income increasing over time, real median household income has gone nowhere since the financial crisis. As such, real wages haven’t kept up, while everything has gotten more expensive in real terms. Thus, it’s much harder to accumulate disposable income for investment.
Related: The Median Net Worth Of Households Has Gone Nowhere
5) The median age homebuyer is getting older. The median age for a homebuyer in America is 32. But as home prices outpace wage growth and more education is required to get the same paying job, it’s easy to see the median homebuyer age increase. Once you’ve put down a large downpayment, it’s hard to have anything left over, especially if you bought in an expensive coastal city.
There’s An Even Worse Scenario To Consider
Yes, it stinks if your entire net worth is made up of your primary residence. But can you imagine not only not owning any investments outside your primary residence, but also renting all these years? What a disaster! Renting is equivalent to shorting the housing market. For some reason people find shorting the housing market more palatable than shorting the stock market. But the end result is quite similar – negative returns.
By now, there should be no debate between owning versus renting. If you know where you plan to live for the long term, it’s best to stay neutral inflation by owning your primary residence. People who invest in stocks and rent realize this. However, those against homeownership just don’t want to acknowledge the truth that like with stocks, the long term trend for real estate is also up and to the right.
For some reason, stock only investors trick themselves into believing they can’t simultaneously invest in both asset classes for the long term. It’s the weirdest thing! But this thinking just goes to prove point #3 above – there’s a lot more financial education that needs spreading.
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I’ve read that both personal, government and corporate debt levels are at record highs…are we living in a global bubble ready to pop ??
Is home ownership really a good thing esp if you can’t diversify? Better to rent and own REITs or possibly investment property in LCOL area if you’re up for that vs buy $1.5M home that will take up large % or all of net worth. No? Lost opp cost on down payment alone is huge not to mention cost of maintenance and taxes that can no longer be deducted outside of $750k in interest and even that is only above and beyond the $24k standard deduction so at most you’re saving like $5000 a year.
It’s a good question, and one that is pondered and supported through my real estate investment thesis: BURL: Buy Utility, Rent Luxury
I think many folks don’t have steady work that offers a 401k and other benefits. I’ve been a professional services temp since 2012. No job, even though they have been relatively well-paying, has offered me the option. I had to set up my own IRA and many people in my position have not, because they are still, irrationally, hopeful to a return to “standard” employment.
I remember doing research on the characteristics of rich people and how they have such a diverse asset base beyond primary residences. It sure holds true.
@Untemplater what was considered “rich” in your research and what kind of assets did the rich folk have?
Am I rich? 6 houses, three cars, stocks, bonds, annuity, various real estate notes and some old furniture that the boomers would consider quality but millennials would think “firewood”.