We know the average spending for American households over the age of 65 is a surprisingly high $45,756 a year or $3,800 a month according to the Bureau of Labor Statistics. Now let's look at the average consumer expenditure per year in more detail.
Given the average Social Security benefit is only $17,532 a year, or $1,461 a month, the average retiree likely has a significant amount of retirement savings in order to account for the missing $2,339 a month.
With no debt, life in retirement is quite comfortable for current Americans in traditional retirement age.
But how much is the average expenditure across all ages? Surely, the average American can't be spending too much while working in order to have so much in retirement. Let's take a look at the latest available data from the BLS.
Average Consumer Expenditure
Incredibly, the average expenditure per consumer unit for 2017 was $60,060, a 4.8% increase from 2016 levels. During the same period, the Consumer Price Index (CPI) rose 2.1%, and average pretax incomes decreased slightly by 1.5%.
For 2023, the average consumer expenditure in America is at least 15% higher overall due to rampant inflation.
Eight of the 10 largest components of household spending increased during 2017. The 12.2% rise in education spending was the largest percentage increase among all major components, followed by a 10% rise in entertainment.
Take a look at the BLS data below and we'll go through most of the line items in more detail.
Average Income: $73,573
Although average income declined by 1.5% from 2016-2017, $73,573 is still a pretty healthy amount compared to the median income in America of ~$62,000.
With the median home price in America at roughly $225,000, it's good to see the home price-to-income ratio is still quite reasonable at 3:1. Once you have a roof over your head, life is pretty affordable.
In some cities around the country, however, the median home price is often 10X or greater the median or average income. For example, the San Francisco median income is $97,000 versus $1,500,000 for the median home price = 15X.
Savvy investors should consider adopting my Buy Utility, Rent Luxury (BURL) Strategy to potentially improve their real estate investment returns. There may be some narrowing of valuations over the longer term thanks to technology and migration shifts.
Average Effective Federal Tax Rate: 12.89%
If you punch in the average income of $73,573 into an income tax calculator, you will see that the marginal federal tax rate is 22% and the effective tax rate is 12.89%.
Given the maximum taxable amount for FICA is $132,900 for 2019, the average income earning household pays the full 7.65% FICA amount.
If the average household lives in one of the seven no state income tax states, then their total effective tax rate is 20.54% (Federal + FICA).
On the other hand, if the average American household lives in a high income tax state such as California, they would pay an estimated 25.55% effective tax rate. This equates to $18,800 in taxes on their average $73,573 income.
If you want to exclude FICA from the effective tax rate calculation given it is included in Spending, then the effective tax rate ranges from 12.89% – 17.90%.
Tax is likely your largest ongoing liability, especially if most of your income comes from W2 wages. Instead, think about earning investment income that is often taxed at a lower rate.
Long Term And Short Term Capital Gains Tax Rates
As soon as an individual starts making over $38,701, their long-term capital gains tax rate falls below their marginal Federal income tax rate.
In addition to earning more efficient investment income and rental income, consider earning business income. Business income can be shielded by various business deductions.
Just ask Jeff Bezos how his company, Amazon, was able to earn $11.2 billion in profits in 2018 while paying zero income taxes.
Average Cash Flow: Negative
Given the average expenditure per year is $60,060, the average American household is likely spending all their gross income of $73,573 and then some.
If the average American household lives in a high income tax state, then they have an average negative cash flow of $5,287 a year ($60,060 – $54,773 in after-tax income).
If the average American household lives in a no income tax state, then they have an average negative cash flow of $1,601 ($60,060 – $58,459 after-tax income).
Negative cash flow is likely one reason why average household debt continues to march to record highs.
Good thing debt as a percentage of disposable personal income continues to stay at multi-decade lows. The below graph shows the average American consumer should be able to withstand a negative economic shock better than during the 2008-2009 financial crisis.
Average Food Spending: $7,729
$644 a month on food seems reasonable. What's unreasonable is the growing obesity epidemic in our country that is putting a great strain on our health care system.
According to the Center for Disease Control, about 610,000 people die of heart disease in the United States every year–that's 1 in every 4 deaths. Heart disease is the leading cause of death for both men and women. And obesity is the leading cause of heart disease.
Average Housing Expenditure: $19,884
Seeing a 5.3% YoY jump in average housing expenditure is concerning since inflation averages roughly +2% a year. If you look at the line items under Housing Expenditure, you'll see Owned Dwellings +10.4% YoY and Rented Dwellings +3.3% YoY.
Whichever line item you want to focus on, such large increases in housing expenditures is the main reason why I encourage all of us to get neutral real estate by owning your primary residence.
Over the long run, you will lose out as a renter because inflation is too nasty a beast to conquer. By at least getting neutral real estate, you can ride the inflation wave while paying down your mortgage.
There are multiple benefits to paying down your mortgage early. Not only will your cash flow get a big boost, so will your peace of mind. If you are a parent, paying off your mortgage is one of the top financial moves to reduce stress and anxiety.
Transportation: $9,576
Spending $798 a month on transportation for the average American is such an incredible waste of money.
According to Kelley Blue Book, the average car price has surged to $36,000, which likely accounts for why Americans are spending so much on transportation.
Meanwhile, auto loan delinquencies have reached 19-year highs, despite a strong economy. A record 7 million Americans are 90 days or more behind on their auto loan payments, according to the Federal Reserve Bank of New York.
In 2023, the average new car price is close to $50,000. This is an absurd amount of money compared to the per capita income of roughly $45,000. Please don't buy a new car if you want to reach financial independence sooner.
Health Care: $4,928
I'm pleased to see the average American household is only spending $411 a month in health care thanks to employer subsidies. The average health care spend makes the average transportation spend of $798 seem that much more ridiculous.
What's concerning about the average health care spend is the rate of growth. From 2016 – 2017, the spend rate increased by 6.9% after experiencing a 6.2% annual growth rate in the year prior.
At an annual 6%+ growth rate, we should expect the average health care expenditure to double in just 11-12 years.
Entertainment: $3,203
Spending $267 a month on entertainment for the average household is quite reasonable. With cheap video streaming, low cost internet, affordable mobile phones, and loads of free entertainment online, we are spoiled with multiple low cost options.
The 10% YoY growth in entertainment spending is very high, which probably is a reflection of strong consumer confidence.
Personal Insurance and Pensions: $6,353
The average household is spending 10.6% of their annual spending on Pension and Social Security.
When we add back the $6,353 a month in Pension and Social Security spending (saving) to the $1,601 – $5,287 negative cash flow, the average American is technically saving $1,066 – $4,752 a year, or 1.45% – 6.45% of their average gross income.
As you can see from the chart below, the current personal savings rate according to the U.S. Bureau of Economic Analysis is 6%, which is in-line with the 1.45% – 6.45% range I've just calculated.
Personally, getting a new 20-year term life insurance policy during the pandemic was the best financial move I made. With two young kids and a mortgage, getting life insurance cover until they are adults provided a huge relief.
I highly recommend you get one as well by checking Policygenius.
It never occurred to me the government categorizes Personal Insurance and Pensions as savings, since most do not have pensions and many see FICA as simply a welfare tax.
Therefore, for those who think the same way, there may be a nice upside surprise to our finances when we reach traditional retirement age.
The Average American Is Living A Great Life
If the average consumer can spend $60,060 a year while working and still spend $45,756 a year after the age of 65, it's clear the average American is doing very well.
The easiest expense to reduce is Transportation at $9,576 a year. With the growing popularity of ridesharing and the invention of self-driving cars within the next 5-10 years, I expect transportation cost to start going down as more and more Americans shun owning vehicles.
At the very least, I see the average household reducing the number of vehicles in their driveways.
With $2,010 a year spent in the All Other Expenditures category, the average American household has also allotted a decent buffer for miscellaneous expenses. As we all know, something always comes up.
Spend Less, Save More Than The Average Consumer Expenditure Data
For those of you who are determined to reach financial independence and stay financially independent, the data says we are likely spending too little and saving too much. But it all depends on what age you want to be financially free.
If the average American can save just 1.45% – 6.45% and live the good life, surely the average personal finance enthusiast who is saving 20% – 50%+ of their income while also building a significant passive income portfolio will do just fine.
Social Security is doing a better-than-expected job at keeping the average American afloat. If you are dubious about the government's ability to pay back its people in retirement, it's worth running a new set of retirement calculations. Chances are you're in better financial shape than you realize.
Related: The Recommended Expenditure Amounts To Achieve Financial Independence
Recommendation: Invest So You Can Spend More
If you want to have the luxury of spending more money, then you need to invest more money. Not only should you regularly invest in the S&P 500, you should also invest in real estate.
Fundrise runs private real estate funds that predominantly invests in the Sunbelt region where valuations are lower and yields are higher. Its focus is on residential and industrial commercial real estate to help investors diversify and earn passive returns.
Fundrise currently manages over $3.5 billion for over 500,000 investors. I've invested $954,000 in private real estate funds since 2016 to diversify my investments and make more money passively. After I had children, I no longer wanted to manage as many rental properties.
Another private real estate platform to consider is CrowdStreet. Crowdstreet is a marketplace that mainly sources individual commercial real estate deals from various sponsors around the country. This way, you have more customization to build your own select private real estate portfolio.
With CrowdStreet, you must diversify your portfolio and do your due diligence on all the sponsors. Look up their track record, their management, and whether they have had any blowups before. Although CrowdStreet screens the deals, you have to do your screening as well.
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. The Average Consumer Expenditure is a FS original post.
America provides a lot of financial opportunities compared to many other developed countries. It is (reasonably) easy to get jobs. It is easy to start your own business. Earning money is “easy”. The problem is over consumption and lack of saving. Americans like to spend what they earn (and overspend for that matter). Similarly, it seems like there’s a gym and a GNC on every street corner yet obesity is getting out of control. Sometimes living in a great country with so many choices and opportunities can lead to poor decisions.
That’s because the growth of our entire economy relies on consumption
You don’t get people to spend more, the economy doesn’t grow
Sounds like we are ignoring high credit card balances and the shockingly low median retirement savings.
People spend more than they can afford thus the credit card debt and bankruptcy rates. They’re also not saving enough for retirement. The age of pensions is over; either people won’t retire or well start seeing other effects from the looming retirement crisis in a couple decades or less.
I’m assuming a consumer unit is a household with the common unit being one that has 2 adults and kids. In this case, I would suspect there are 2 vehicles per consumer unit in many situations (e.g. a family living in the suburbs) so the transportation cost may not be THAT wasteful and the 2 vehicles are worth the benefits (especially if both spouses need to drive to work, shuttles kids to activities while the other does errands, etc).
A few random thoughts regarding your very thought provoking Post, and some of the comments.
Regarding Household Income, it’s likely that many of the retired households are receiving two Social Security Benefit payments (either because both people in the household worked for some period of time, or because of the availability of the Spousal Benefit offered to those who didn’t work or whose earned Worker’s Benefit amount is less than their Spousal Benefit amount).
Also, while Defined Benefit Pension Plans have been dramatically scaled back for people in the work force today, many folks who are presently in the Retired Cohort ARE receiving income from a former employer’s pension plan. While some of these folks do have decent retirement nest eggs, many don’t. For those who don’t, the bulk of their retirement “equity” frequently comes from the equity they’ve built up in their home, which often is mortgage free by the time they retire.
Regarding the “home ownership versus renting for life” debate, over the years most of the retired clients in my tax practice who are in “better” financial shape (“better” being defined as having a monthly surplus of income over expenses, an ample emergency contingency fund, and a decent amount of other retirement savings not counting any pension[s] they may have) have tended to be those who owned their home and managed to payoff their mortgage prior to retirement. While some of these individuals do have Home Equity Lines of Credit and/or Home Equity Loans (say for a vehicle purchase, home remodel, addition, etc.), the fact that they don’t have to make a monthly mortgage (or rent) payment gives them more financial flexibility as they manage their income and expenses. Yes, they do have to pay real estate taxes and home maintenance expenses, but those costs are typically rather small when compared to a monthly mortgage or rent payment. For the vast majority who own their home mortgage free, there is a greater sense of financial security and peace of mind vis-a-vis those who are still having to pay rent or make a monthly mortgage payment.
Americans generally have much better financial opportunities than people who live in many other parts of the world. While there’s certainly room for improvement in some areas, we have much to be thankful for if we live in the USA.
It would be interesting to redo this article with median dollars instead of average. What changes would we see?
Sure. Just reduce all numbers by about 15%.
At the beginning of the post, you cite the gap for households over 65, using the Social Security figure.
Wouldn’t many retired households have more than one SS benefit – due to either the spouse’s work history, or spousal benefit?
Now that is a great observation! You are probably right, which helps explain the high spending. Which also boosts support for Social Security as really working.
As an America, I’ve won the financial lottery ticket when compared to people living in the rest of the world. I think I’ve read somewhere that 70% of the people globally live on less than $4,000 a year. I think the average American might lose sight of how lucky and fortunate we are compared to others around the world. It’s the mentality of comparing ourselves to people with more as opposed to taking stock in how well we are doing when compared to the majority of the world who have a lot less.
I’m very bullish on America to be the continued economic leader of the world and to continue to drive the global economic growth.
My wife’s view is that she wants a home, homes, and a house is not a home until your name is on tse deed.
What stood out for me is how many Americans are past due on their car loans. It’s really alarming that it has increased from 5 to 7 million people during the last eight years and plus they are 90 days behind their payments. Many of these car buyers should realize if they can really afford buying a car at a certain price and not get caught up on the perks of what the car can do for you. The financial aspect of owing something like a car is a big factor. We all can hope that many car buyers currently part of that data will get back on track on making those car payments and eventually paying them off.
This is why Sam’s Rule of thumb on car buying (not > 10% of gross annual income) is important.
We have found that 2-3 yr old 20K mileage cars suit us just fine and are CHEAP, compared to new.
Have never had a car loan – EVER.
I can’t think if anything more dumb except maybe purchasing a timeshare.
Sorry, but the average american is stressed to the gills financially and your point about being in the hole each year shows that. Average life expectancy has also decreased 3 yrs in a row.
America is in decline, automation will make it even worse for millions.
“Average Cash Flow: Negative
Given the average expenditure per year is $60,060, the average American household is likely spending all their gross income of $73,573 and then some.
If the average American household lives in a high income tax state, then they have an average negative cash flow of $5,287 a year ($60,060 – $54,773 in after-tax income).
If the average American household lives in a no income tax state, then they have an average negative cash flow of $1,601 ($60,060 – $58,459 after-tax income).”
Mark, can you share some of the reasons why you are stressed out and how you got to your situation? What are some things you plan to do to improve your finances? Thanks
Me specifically? Graduating $27k in student debt, along with marrying a wife that had $50k set us back 10 years I believe.
Way I fixed that is marry her where she makes a lot more than me hahahaha.
While we save a lot now, we didn’t always and her landing a 6 figure job helped a ton. Of course that requires almost 3 hrs a day of just commuting time.
In our area there’s no place for work that pays even remotely well so that requires short distance (30 miles) but long time being in the DMV area.
I’d assume we are doing way better than many, but we are making health and well-being sacrifices to be more financially secure.
I’d say we are 10 yrs behind where the boomer gen was when they were going through their 20s and 30s.
We also don’t have kids, where as that would pose a significant financial burden for us as it does many.
Got it. Doesn’t seem like both being and employed and making six figures is that terrible a situation.
Maybe we are simply too comfortable in America? Things were much worse in Zambia and Malaysia when I lived there.
I feel like living in America is almost like being on vacation compared to trying to get financially ahead in many other countries.
Great commer about being on vacation here in America.
People work 12 plus hours a day for very little money in countries like India. But, they always seem content and maybe even happier than most Americans. Go figure!
Fascinating data points! I found the breakdown by categories super insightful and also the tax section. Location sure can make a difference on housing costs and taxes. And it will be interesting to see how transportation costs change in the future. I’m also very curious to see how self driving cars develop. I sure hope the technology gets really good so that it becomes reliably safe. I’d love to have a self driving car when I’m older.
Elon Musk just stated that full self driving would be ready at the end of this year. So, adding in the extra ‘Elon Talk’ time, it does seem reasonable to expect this to start to roll out around 2022, and by say 2025, be pretty widespread. I’d imagine be 2030, it’ll be mostly standard.
Elon Musk is a con man. He said the same thing in 2016. And 2017. And 2018. Actual experts put us closer to 20 years from any true autonomous vehicles.
I’ll be happy if self-driving cars are commercially available and safe by the time my boy turns 16 in 2035.
Having teenagers drive is a dangerous proposition.
I hate to point it out but you kept throwing out averages and those are skewed, especially in the US. Really would have liked to have seen all that done in median figures.
It’s cool. You’re free to compare yourself to the median. I like to compare myself to the average, especially when there over 100 hundred million data points.
That’s the beauty of personal finance. There are no set rules to financial freedom.
And that thing is likely 98% or 99% of the readers and close to 100% of the posters here in Financial Samurai are WAY ABOVE the US averages for income and assets!
Except no one can really cash out fully because we all need a place to live. The owner could downsize into a smaller, cheaper home and pocket the difference, but then the renter could also pull part of the savings out of the market at that time and purchase the same home. The question becomes, after doing so would the renter have more savings left over than the difference the owner pocketed after downsizing? A lot of that depends on what the market does during that time as well as what the actual costs of the owner are in terms of maintenance, improvements, etc. Not a black and white answer unfortunately.
You can cash out big time (yes not fully) if you are willing to leave the country. Rent for a very nice place in many countries will run you a fraction of the cost of the good old USA. Or I can live in a hotel full time for about the same as what monthly rent would be in my home town.
Today I could sell my house for about $600,000 and these dollars are going to allow me to live in Asia for a fraction of the cost. I also will have a pension and over $2,000,000 in invested assets.
Maybe I have saved to much but I would rather save to much than not to have saved enough.
I realize many people have no desire to leave the USA but I’m so looking forward to living outside the US at least as long as I stay healthy. My wife also is looking forward to leaving the US and we have no children and no living parents so nothing keeping us here.
2 years and 3 months until I’m eligible for my pension – Asia here we come.
This was refreshing to read. Most Americans are pretty well informed I feel. I know more and more people switching to cheaper online tv options, and better cell phone plans. Maybe the media doesn’t use a representative sample when discussing American’s spending behavior. I still want to save as much as I can…the whole fear of the unknown thing I guess. :-)
“For those of you who are determined to reach financial independence and stay financially independent, the data says we are likely spending too little and saving too much.”
This made me chuckle. You see, my 401k contribution is at 30% these days and I’m 32 years old. I logged in to my 401k benefits website the other day and got this message in the little warning window: “[Name], your investments may be too aggressive. If you’re retiring in 33 years, your investments are too aggressive.”
I’m young and I’m about 95% in stocks because I can weather the market fluctuations for the next 10-20 years.. If something were to happen where that’s all moot, then we’ve got bigger problems in the world and I’m hoarding all my drinking water and canned goods instead of money.
That is interesting your 401(k) benefits site has said you are too aggressive. Ah, there is caution after all with financial firms. That’s good to hear.
Yes; I’m rather impressed with all the tools they provide us when I log in to check my balances (can you believe I get a “pension”, too? It’s called a Cash Balance plan, instead – but the company puts in 100% and I’m fully vested – wowza!). Just a side note, it makes me wonder: if these tools had been available when my parents were in their prime earning years 20 years ago, would they have saved more money to avoid being strapped for cash as they now approach retirement?
Thanks!
We spent right around $60,000 last year so we’re in line with the average household. Our transportation cost is much lower than average, though. We usually spend about $100/month. The car is all paid off and we plan to keep it for 10 more years. The housing cost is what drove our COL up.
We also spent a decent chunk on travel. I guess that’s entertainment. I see that the average household spent less than $300/m on entertainment. Does this mean most people don’t travel?
Life is good in the USA.
“Over the long run, you will lose out as a renter because inflation is too nasty a beast to conquer. By at least getting neutral, you can ride the inflation wave while paying down your mortgage.”
This was an interesting article but I’m just not sure I agree with this. The average new home buyer’s mortgage payment is nearly $1,250. That is before homeowner’s insurance, repairs and maintenance, possibly property taxes, etc. In comparison, the median gross rent is about $1,000/month. That extra $250 (which is probably more like $400-$500 after additional costs) being added to an investment portfolio more than keeps up with the inflation bumps.
This is clearly a simplistic view and doesn’t take into account things like mortgage vs rent $ per sq. ft (i.e. generally people are probably deciding between a smaller apartment versus a larger single family home). In addition, local markets can look very different in various parts of the country as you’ve covered. Today, however, rent in many big cities is far cheaper than home ownership. So much so that many young people are better off investing the difference and absorbing the rent bumps each year. There is a huge opportunity cost to home ownership’s inflation protection.
Sure, except at the end of 30 years, the renter can cash out for (checks math $0), and the home owner can cash out for (checks math, a lot more than that)…
The renter can cash out for whatever the $250+ per month s/he has saved for the past 30 years has grown to in value…
$250/month at say 6% a year over 30 years results in a little over $250,000.
The renter’s rent will not remain static for 30 years. The homeowner’s mortgage payment will. The $250/savings is measly to begin with and will dwindle with inflation and increasing rents through the years. $250 becomes -$250 rather quickly.
Not to mention the missing component of pride of owning your own home and the peace of mind knowing some Landlord can’t arbitrarily increase rents, decide to sell, etc.
Homeowner wins.
So we don’t worry about a “measly” $250 (25%+), but are scared to death of rent inflation at ~2-3%… Got it.
Yes, rents increase. So do property taxes, cost of maintenance & insurance, etc.
Your peace of mind knowing the rent can increase is no different than someone else’s peace of mind knowing they aren’t on the hook to pony up thousands of dollars when the A/C goes out.
As fun in the sun says below, speaking in absolutes about this does not make sense. I should have stated this in my original post.
The renter doesn’t have to waste time arguing with their insurance company about who’s going to pay $10-12k for a new roof. Home maintenance is why I’m trying to convince my retired and in poor health parents to sell their house and rent. Peace of mind and an extra $250k in my pocket is why I rent.
Except no one can really cash out fully because we all need a place to live. The owner could downsize into a smaller, cheaper home and pocket the difference, but then the renter could also pull part of the savings out of the market at that time and purchase the same home. The question becomes, after doing so would the renter have more savings left over than the difference the owner pocketed after downsizing? A lot of that depends on what the market does during that time as well as what the actual costs of the owner are in terms of maintenance, improvements, etc. Not a black and white answer unfortunately.
I agree with this. If you are able to have willpower and save the difference rather than spend it, renting can make more sense in certain markets and the growth of the savings in the market should exceed inflation. Given the average American’s inability to keep from spending every last dollar in their wallet though, the advice is often to buy vs rent because it becomes a forced savings account and allows you to at least keep even with inflation.
Good observation John.
Investing the difference is great in theory. Unfortunately, Americans aren’t very disciplined when it comes time to saving and investing. Whereas homeownership is forced savings, otherwise you lose your house to the bank.
If we were so disciplined, we’d all have six-pack abs too! Alas, 60%+ of Americans are overweight or obese, and the percentage is going higher.
There’s a reason for the stat: the average homeowner is 40-44X wealthier than the average renter.
Nobody recommends shorting the S&P 500 over the long term. Not sure why people would think renting over the long term is better.
“Investing the difference is great in theory. Unfortunately, Americans aren’t very disciplined when it comes time to saving and investing.”
Well, sure, but if we’re going to start introducing irrational behavior into the discussion, we can start talking about how people can irrationally buy more home than they can afford, or not maintain their homes properly, …etc. I do agree with the point that owning a home can become forced savings, which may make it a sound practical recommendation for many individuals. Hopefully your audience is more reasonable than that.
“Nobody recommends shorting the S&P 500 over the long term. Not sure why people would think renting over the long term is better.”
Except that by owning a home and foregoing the additional investment of the savings of rent, you essentially are shorting the S&P 500 by “borrowing” from an investment account that would have otherwise been invested in the S&P. You are giving up equity (or diversified portfolio) returns in exchange for the growth rate on your home.
Sure. Everybody is free to do whatever they want with their money and their living situation. At the end of the day, you have to look at your current financial situation and be satisfied with what you have.
There are obviously times when renting is better. I hope people will read this post: https://www.financialsamurai.com/real-estate-investing-rule-rent-luxury-buy-utility/
Are you renting now? We also all have the tendency to be biased based on our own decisions. And that’s fine. Again, everything is rational in the end. And I’m not worried about the average American who is doing quite well.
Not to mention that many home buyers refinance multiple times so they in essence withdraw their forced savings and stay in debt so there is no cash out after 30 yrs
So this “many” stat you bring up what is it actually? Also How many are refinanced for a lower rate and not to with draw their forced savings? the numbers I have found are that less than 1 % of homeowners refinance to cash in on forced saving, not including reverse mortgages. Your POV, in theory, may be sound however; the numbers do not lie, and in disregarding them you are lying to yourself. The fact is home owners are 40 times better off than renters. This is not arbitrary or related to irrational behaviors, it is related to actual behavior.
The New York Times published a handy rent-vs-buy calculator which allows you to adjust multiple parameters (link in name). For an average $1.5 million San Francisco home, it never makes sense to buy assuming you can rent for less than $6300/month and earn at least 7% on your investments (and, as Sam said, actually invest the money that would have been spent on the home).
While I agree that in some cities, San Jose or Manhattan for instance, renting is better because real estate prices are sky high; in general I think Sam is right. I find this to be one of the more bizarre examples of cognitive dissonance in the personal finance community. PF bloggers tend to be vehemently opposed to home ownership because of the “hidden costs” and at the same time huge proponents of owning real estate over stocks for investments because of the “passive income.”
Think logically about those two ideas. If real estate is a good investment it is because you are generating a return above your costs. The rent you charge includes your mortgage, property taxes, an estimate for repairs and vacancies, and then some profit. So why do you assume that when you are renting a house from somebody else you are somehow getting a better deal and NOT paying those “hidden costs” of home ownership? The costs are still there plus you have the risk of rent increases, being forced to move from your property, etc.
That’s because it is different sub markets within the city.
I live in a luxury high rise. Rent is $3k per month, buying would be $600k.
I own plenty of real estate in B class housing in the same city. Every $600k I invest, brings in $7k-$10k per month.
Home ownership is great in some places, and terrible in others. Anything spoken as an absolute doesn’t make a lot of sense.
What city are you in? That’s a great rental return.
This makes a big assumption that the renter is saving/investing the difference. Since most of the country doesnt save enough anyway, and many are living paycheck to paycheck this form of “forced savings” puts them ahead vs renting.
It’s been said many times that if you are born in USA you are already on average living a life of luxury. I’ve been living a very blessed life sir. Thank you for the post.
I’d be interested to see a breakout of the Consumer Expenditure Survey data by age group. I’m sure the variations will tell different stories across generations about the average savings rate and spending habits.
When I dealt with this data in college, I found it surprising how the Bureau of Labor Statistics categorized insurance and pensions as a spending category. When you match average expenditures with average income, you do observe a cash flow negative result. However, digging into the spending categories tells a better story of saving (barely).
Despite the constant worries of PF bloggers about advising people to save more, the Paradox of Thrift could hurt the economy as a whole if more listened. John Maynard Keynes said that such a mass increase in savings eventually hurts the economy as a whole as it shrinks the amount of aggregate consumption and hurts investments in the economy. So, would we all be able to save 20-50% of our incomes of the rest of the country followed suit?
Critics of Keynes argued more savings would create an availability of funds which would depress interest rates and induce more lending. Perhaps the economy would find a new balance and people could save more in the long-run.
The median age in America is 38. So you can use the $60,060 figure as the average spend for those in their mid to late 30s. Not bad.
“Too many people saving” will never happen. The world, as a whole, is too undisciplined to save consistently. Having discipline to do what’s hard is a tremendous advantage in life.
That really was a great breakdown Sam.
It is not surprising that the average household has a negative cash flow and increases debt each year as most people finance their lifestyle these days. What is a bit shocking is that the average in retirement is doing so well. I am sure that it is being buoyed by a smaller percentage of people that have saved a lot during their working years and have a big nest egg. That would certainly skew the data. That is why I usually prefer data using median values rather than average.
Also, the spending number ($45K/year) recited in the article is a household number while the SS average benefit number appears to be per capita. Many households include two SS recipients in light of spousal benefit rules. The contribution in those households from SS is more like $25K/yr assuming the spouse is receiving 50% of the primary earner’s benefit. Looking at the figures I would assume a common example of a married household with no dependents often looks like this:
SS contribution – $25,000
Walmart greeter (20/hrs/wk at $9/hr) = $9,500
$150K total 401(k)/IRA savings (using 4% rule) = $6,000
draw down from home equity loan/reverse mortgage/credit cards = $4,500
Based on the fact that income distribution is highly skewed towards the top 10-5% in todays america using the average rather than the median is useless for 90% of the working folks. Their financial picture might indeed look very different. Do this for the 25 to the 75 percentile of the income distribution and compare it to the average numbers and you will see that they look vastly different.
“For those of you who are determined to reach financial independence and stay financially independent, the data says we are likely spending too little and saving too much.”
Yes but the average American as you’ve detailed will work 40+hours a week at a job they don’t like until they are 65 or even older. Not exactly my definition of the good life.
Love the data. If anything it shows again why America is so great.
I agree! This article does indeed show the potential of what can be accomplished in America, however I am not sure that spending more than you make and being in debt forever is exactly what I would call a dream….it is my personal nightmare!
Why do lenders make 30 year mortgages
To 65 year olds? Why do 65 year olds even want a mortgage ?
I thought 65 year olds should not have a mortgage.