Monday, May 14, 2007

Building Wealth

I saw this at at

Take a 30-year-old earning $30,000. He or she would only have $216,000 in a 401(k) at age 67, assuming he or she was saving 3 percent of salary, the company was providing a 1.5 percent match and their investments were returning 7 percent per year, according to Vanguard.

So, the sad truth is that nine of 10 American baby boomers have less than $250,000 saved for retirement, a 2005 survey commissioned by Merrill Lynch found. As we've seen, that isn't enough. And if you're hoping for a pension, well, good luck, because half of working Americans don't have a pension plan and even if you do, you can't count on it being there later because corporate America has been shifting away from pension promises. As Americans, we've got to take personal responsibility for our financial future and that of our families.

I thought: "This would be a great lesson on why we need a national pension system." But, no; that is not the point the writer, Jennifer Openshaw, could think to make. Instead, she said "buy real estate" because

"it's tangible and, as an investor, you can enjoy both the appreciation and the income generated as rents rise in the future. Plus, you get the power of leverage with your money -- something you don't get with many other investments -- meaning you might put only 20 percent down but you enjoy appreciation on the entire value of the home."

This is a common theme in financial "self-help" books; but really now, how many people can afford a second home on $30,000 per year? How many people can afford their first home on $30,000 per year? What if the home loses value? (You can read about that problem over at The Housing Bubble Blog and Calculated Risk Blog.) These "financial gurus" never seem to talk about that.

She also talks about the need to have adequate health care insurance.

What is it about these financial gurus and the disconnect between the examples they give of the financial situations of the people they use as examples and the solutions they give? They always seem to give millionaire answers to people with immediate cash-flow hundredaire problems. The problem isn't just that Americans are using too many credit cards (although that is a component of the problem); the problem is also that the working class is not being compensated based on their productivity and sharing in the profits thereof.

The answer actually is pretty obvious: pressure businesses to raise their employees pay so they can save adequately and raise taxes on the wealthiest to pay for the social services and programs that the working class is going to need.

1 comment:

Jacqueline S. Homan said...

There's something else that evades the minds of the Suzie Ormans of this nation. That is the very real problem of middle-aged workers being shoved out of their jobs and denied opportunities for another job due to age discrimination 15-20 years before they hit retirement age and can draw on social security and their retirment funds.

Another factor is that the majority of people do not get the chance for a solid, stable career that is conducive to wealth accumulation when they are young so they can get those years of decent earnings under their belts. For those who were fortunate enough to have a 401(k) to being with - and presumably able to afford to contribute to it - when you are downsized, reorganized and restructured out of a job in your late 30's to late 50's, your savings diminishes rather quickly once unemployment benefits expire but you still remain jobless (despite making superhuman efforts to get another job).

With mortgages to pay, and no income - or too low of an income - any savings accumulated does not last very long.