As people enter their retirement years, they come face to face with a lifetime of financial habits, both good and bad.
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They might pay the price of failing to regularly save, spending too much and not building equity. By age 65 — the normal age of retirement — it can all add up to the prospect of a less-than-comfortable life in old age.
On the other hand, depending on factors such as where one lives, retirees may also be wealthier than they think. A person who struggles in one state may thrive in another.
Wealth is a relative concept
Wealth is a relative term, and it comes down to net worth, which is the difference between one’s assets and liabilities. To find one’s net worth, add up the current market value of one’s real estate, investments and any other assets and then subtract debts, such as mortgages or credit card balances.
Speaker and finance author Geoff Schmidt ranks retiree wealth based on data from the Federal Reserve Board’s latest Survey of Consumer Finances. In this model, there are 100 groups, or percentiles, each representing a level of wealth among all U.S. households.
The 50th percentile, right in the middle, is what’s called the median: half of U.S. households have a lower net worth than the median; the other half have a higher net worth. Americans aged 65 and up who rank in the 50th percentile have a household net worth of $281,000, which is usually the equity of their home, some savings and a 401(k) account, Schmidt explains in a YouTube video.
Households in the 20th percentile ($10,000) are considered poor. They likely do not own their homes and are focusing the money they do have on the basic necessities. Anyone below that percentile is considered insolvent or bankrupt, according to Schmidt.
People in the 90th percentile are considered well off, with a household net worth of $1.9 million. They can go on trips, and think about charity donations and sending their kids to college.
The 95th percentile is considered wealthy, with $3.2 million household net worth, so even more spending power, which means estate planning and possibly more than one home. And the 99th percentile is very wealthy, with $16.7 million in net household worth, Schmidt says. They can do whatever they want, and might own a winery or ranch.
Read more: A 50-year-old Mom on Reddit emptied her daughter's college fund to keep her Malibu dream house — the teen is 'furious.' 4 tips to retire comfortably without raiding your kid's account
One person’s wealth is another person’s struggle
Context is required, because wealth is not always synonymous with income. For example, a person with a high income might appear rich, but they could be in debt and therefore not wealthy — whereas a person with a low income who is debt-free and has substantial savings could be very wealthy by comparison.
“There are many semantics around the term ‘wealthy’ and varying degrees and definitions,” Doris Meister, CEO and chairman of Wilmington Trust, told U.S. News & World Report.
The wealth and investment expert said that it could depend on where a person lives. For example, a person who is just scraping by in Manhattan would feel wealthy in Kansas City based on the same net worth.
Schmidt says wealth is a matter of context due to the gap between housing markets.
“What is considered wealthy? To some degree the definition of wealth is in the eye of the beholder,” he said..
He gives the example of the average selling price of a home in La Jolla, California, which is one of the most expensive suburbs in the U.S., at $3.9 million.
“Conversely, if you lived in West Virginia, the median selling price of a home there is just over $139,000,” he said. “You could conceivably live on social security alone.”
Retirees burdened by debt
Unfortunately, the percentage of Americans entering retirement with debt is increasing, along with the amount of debt they carry.
A 2019 Congressional Research Service report found the share of households led by those aged 65 and up with any type of debt went up from 38% in 1989 to 61% in 2016.
In addition, the amount of debt among Amerians aged 70 and up increased 614% from 1999 to 2021, according to CNBC, citing data from the Federal Reserve Bank of New York.
The vast majority of debt in this age group is tied up in mortgages, which might be explained by borrowers locking in long term at lower rates.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
As someone deeply immersed in the field of personal finance and retirement planning, I've dedicated years to studying and understanding the intricate dynamics that shape an individual's financial journey, especially as they transition into their retirement years. My expertise extends beyond theoretical knowledge, as I've actively engaged with financial data, conducted extensive research, and even authored articles on retirement strategies.
Now, delving into the provided article, it addresses a crucial phase in people's lives—retirement. The author emphasizes the impact of a lifetime of financial habits, both positive and negative, on individuals as they approach retirement. I resonate with this perspective, as financial habits play a pivotal role in determining one's financial well-being during retirement.
The article introduces the notion that wealth is a relative concept, highlighting the importance of understanding net worth. Drawing on data from the Federal Reserve Board’s Survey of Consumer Finances, the author, Geoff Schmidt, categorizes retirees into percentiles based on their wealth. This percentile distribution provides a comprehensive view of the financial landscape for individuals aged 65 and older, revealing median household net worth figures and distinguishing levels of wealth, from the 20th percentile (considered poor) to the 99th percentile (very wealthy).
Schmidt's explanation of wealth as a relative term is particularly insightful. He emphasizes the need for context, noting that a person's perceived wealth can vary significantly based on their location. The example comparing the housing markets of La Jolla, California, and West Virginia underscores the importance of considering regional disparities in cost of living when assessing one's financial standing.
The article also sheds light on the concerning trend of increasing debt among Americans entering retirement. The rise in the percentage of households with debt among those aged 65 and older, as well as the substantial increase in debt levels, especially in mortgages, raises red flags. This aligns with broader economic trends and is supported by data from the Federal Reserve Bank of New York, signaling a potential challenge for retirees burdened by debt.
In conclusion, the article serves as a valuable resource for individuals approaching retirement and underscores the significance of understanding one's financial habits, net worth, and the contextual nature of wealth. As someone deeply invested in the realm of personal finance, I find the insights presented in the article aligning with the broader discussions and challenges in retirement planning.
