Wealth study leaves out one important asset

Monday, November 7, 2011

If you've wondered where the impetus behind the "occupy" movement originates, a new Pew Study may offer some insight.

According to an analysis of census data, the net worth of a household headed by a person 65 or older has a net worth 47 times greater than a household headed by someone under 35.

While it's normal for people to accumulate assets as they age, the gap is more than double what it was in 2005 and five times what it was 25 years ago, when it stood at 10 to 1.

The report was issued just in time to support "means testing" for Social Security, Medicare and other entitlements as a special congressional committee struggles to find more than a trillion dollars in budget cuts over the next 10 years.

"It makes us wonder where the extraordinary amount of resources we spend on retirees and their health care should be at least partially reallocated to those who are hurting worse than them," said Harry Holzer, a labor economist and public policy professor at Georgetown University.

But the wealth comparison overlooks one resource younger people have in abundance compared to retirees -- time.

Yes, many young people are saddled with mortgages on homes they really couldn't afford in the first place, and homes have returned to their more traditional role of providing shelter rather than serving as a guaranteed growth investment.

But young people still have time to change their lifestyles and means of income, options that are closed to retirees and older workers.

Small changes can make a big difference, provided one has enough time. As Christian financial adviser Dave Ramsey likes to point out, giving up smoking, at $3 a day habit, saves $90 a month. Invested at 12 percent from age 16 to 76, that would yield $11,622,000 million. Granted, you can't get those types of interest rates in a savings account, but long-term stock market investments can easily yield those numbers.

Giving up a $5 gourmet coffee a day can translate into $19 million, and brown bagging it instead of buying an $8 lunch is worth more than $20 million over 60 years.

He also likes to use the example of a young man who saves $167 a month, $2,000 a year from age 19 to 26 and then stops, and a man who starts saving $2,000 a year at age 27 and stops at age 65. The first man winds up with $2.288 million after an investment of only $16,000, while the second has $1.532 million and never caught up with the first.

Rather than being used to penalize older Americans who can no longer change their financial trajectories, the Pew Study should serve as inspiration for younger people to change theirs.

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  • Why would you use the age of 16 for giving up smoking and investing in the stock market? Pretty sure, the people who would really benefit from that are a tad bit above the age of 16. Not a lot of 16 year olds out there, regardless of smoking habits who are going to invest in the stock market and I'm pretty sure they'll want to retire before they hit 76. The market is changing and the 10 year growth cycle is not the same as it used to be when this guy was figuring cigarettes at only $3 a day. Otherwise, 12 percent was reasonable but the market has lost that level of even its long term certainty on rates of return.

    Between the ages of 19 to 26 is a time when people have little to no money because of college and they're just beginning their careers. It sounds easy in theory but it's a flawed theory when factoring in common sense.

    Let the old keep the money they earned and let the young keep theirs.

    -- Posted by McCook1 on Tue, Nov 8, 2011, at 11:27 AM
  • I noticed the same thing, however I think it was just an example to demonstrate the significance of compound interest.

    -- Posted by bberry on Wed, Nov 9, 2011, at 7:13 AM
  • There is a very strong relationship between wealth and education. Folks without a high school diploma make way less than those who graduated from high school. And it continues with those with a community college or tech college degree make more than those with just a high school diploma. And a 4 year degree brings greater wealth and if you have post bachelor degrees even more weath follows. If folks want greater wealth for themselves and their children, education is the key.

    -- Posted by dennis on Wed, Nov 9, 2011, at 11:41 AM
  • I agree that this example is certainly flawed, but McCook1, although I can't argue that young people WON'T invest in the stock market, the point being made is that they SHOULD. That being said, good luck finding even long term investments that average out more than 9.5%. That might change but I'd say, it won't be for the better, not for a while anyway.

    Dennis, I agree, education is important, but more so is the ambition to work at all. I see a huge lag in the blue collar market, and a slush quantity in the white collar market which has resulted in a lot of educated people sitting around complaining about NOT having employment opportunities.

    Prediction: in the very near future, the $ will be in the trades, construction, HVAC, PLMG, general construction, because as Supply & Demand dictates.... An HVAC man is worth a $1000.00 when the heat is out on a fridged day..... He's worth a million if he's the only one there to fix it.

    -- Posted by PensiveObserver on Tue, Nov 15, 2011, at 9:11 PM
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