Posted by: Jason T. Johns
While the US economy has experienced more than ten years of economic growth, Americans, even the “wealthy” ones, are worried about running out of cash and are scared to spend. Recent reports show that many retirees (and near-retirees) are sitting on their wealth in much the same way large corporations are hoarding stockpiles of cash.
The Gross Domestic Product (GDP) is steadily growing. There are low-interest rates, low unemployment, a stable currency, and more than $1 trillion of available investor cash. For those retirees who are financially well off, why is there anxiety about money and reluctance to enjoy it in retirement years? Yes, many of the wealthy are planning on leaving a legacy to their heirs, but something else is happening.
All Americans, even the wealthy ones, are experiencing uncertainty about their economic future. Will their rate of return on investments be able to address increasing medical costs? Will they have enough income to support themselves when taking into account their longevity risk? Collectively, Americans are not saving enough to accomplish a successful retirement. However, individually, wealthy Americans are fearful of losing their financial position in a severe market downturn. These wealthy Americans have already lived through harsh economic times, particularly the Great Recession. Market bubbles present themselves from time to time, and if the free market successfully deleverages them, there is little economic incident. But when the bottom drops out, bleak economic times follow.
Given those experiences, the Americans who have most benefited from this 10-year boom cycle in the American economy are averse to spending their money. They want to survive another economic downturn while maintaining their elite financial status. This conservative approach will likely guarantee them a very comfortable lifestyle even in the event of bleak financial times. However, the rich sitting on their wealth creates stagnant money, which negatively impacts the vitality of the American economy.
The Federal Reserve provides a quarterly balance sheet of all individual and charitable monies and America’s combined net worth now stands at $109 trillion. It is a lot of money; however, it has disproportionately flowed to the wealthy. Celebrity and wealth-obsessed culture saturates Americans with images of the rich with expensive real estate, private jets and yachts, and attending posh philanthropic parties. The reality of the average millionaire in America is far more frugal than their Instagram and paparazzi driven counterparts.
Being cautious with money is inherently prudent, particularly at the height of an economic boom cycle. Even without market uncertainty, a key characteristic of modern capitalist economies is a boom-bust cycle. A process of economic expansion (boom) is followed by economic contraction (bust), and the cycle occurs repeatedly.
As you age, the tendency is to become more risk-averse, according to the National Institutes of Health (NIH). With the bulk of the wealth of America in older households than in previous decades, it is no surprise that risk-averse strategies are in play. A lifetime spent acquiring wealth and watching accounts and investments mature then morphs into retirement years of asset spending and the dilution of wealth. The majority of wealthy Americans are not keen to adapt to the life cycle of asset accumulation followed by retirement spending. Their preference is to live frugally, retaining as many assets as possible to be able to ride out an economic downturn or to be prepared for a catastrophic event.
Planning for retirement can be stressful. Having a proper estate plan in place can eliminate much of the stress, especially when it comes to transferring assets to children who may not be ready to handle large sums of money. We can help. Give us a call to discuss your wishes, and how to design a plan that will help carry out those wishes.
Our firm is dedicated to helping our clients and their loved ones work through issues and implement sound legal planning to address them. If we can help in any way, please don’t hesitate to contact our office at (630) 221-1755.