Americans have been facing a dramatic drop in net worth by age for most age ranges over the last five years.
This phenomenon is creating long-term concerns for people of all age groups. As they get closer to retirement, the effects will surely be felt when these individuals are faced with the notion they will need to make serious adjustments in their lifestyle.
Calculating Net Worth
It starts by asking; What does net worth mean? A person’s net worth is relevant because it shows their financial health. Net worth is also a reflection of a person’s ability to consume goods without accumulating debt. Here is how to calculate net worth; simply subtract all debts from the “perceived” cash value of all assets. Primary assets include cash, valuables (jewelry and Art), financial market investments and real estate. People can use the internet to find a good net worth calculator to assist in this calculation.
Looking at Average Net Worth By Age
According to the Pew Research Center, individuals under age 35 are essentially net debtors with little or no net worth. By the ages of 45-54, people are entering their primary earning years. In 1984, this group had an average net worth of $113K. By 2009, that number had actually decreased by 10%. When adjusted for inflation, the drop is much more significant. Additionally, recent surveys have shown that 72% of this same age group had accumulated savings/investments of less than $100,000 with 46% of them under $10,000. Without actively saving, these people figure to have an inadequate amount of net worth for use during retirement.
How is Net Worth Created?
Here are some of the better ways for Americans to create net worth.
- Real Estate – For many Americans, the net value of their home represents the largest portion of their net worth. As people payoff their mortgages and property values increase, their net worth figures to increase.
- Investments/Savings – For decades, the U.S, Government has encouraged Americans to increase their savings by offering tax breaks to individuals who save through investments in 401Ks and IRAs.
- Avoiding Debt – The best way to increase net worth is by living within one’s means. A person with no debt will find it easier to accumulate assets.
America has never been a nation of savers. Many people tend to live for the day hoping that the future takes care of itself. The problem is that people who don’t save during their prime earning years will find it more difficult to save later in life. With so many young Americans carrying a heavy debt load from school loans, it has adversely affected their ability to start saving at a reasonable age. Recent figures show that only 60% of the people ages 45-64 have accumulated investments through the use of 401Ks or IRAs, the easiest methods of saving.
Recent Trends Affecting Net Worth
Recent economic trends have slowed down the anticipated accelerated growth in net worth. The biggest issue involves a nationwide decrease in property values. Since 2007, most American have experienced a significant hit to their property values. While real estate is still considered to be a great investment, recent economic issues (the great recession) are creating more long-term problems than prior recessions.
While living paycheck to paycheck, it is difficult for individuals to think about increasing their net worth. This will become a bigger problem should the Social Security system start to fall apart. The net effect of not accumulating net worth will be more and more individuals being forced to work far beyond retirement age.