April 7, 2014 -- intro: Our nation's Social Security system is said to be woefully underfinanced, but if you think Americans are any better off with their private savings, think again.
Forty percent of individuals in the U.S. said they could not or probably could not come up with $2,000 if an unexpected need arose, according to research by Atif Mian of Princeton University and Amir Sufi of the University of Chicago Booth School of Business.
The two academics studied data from the 2012 National Financial Capability Study by the Financial Industry Regulatory Authority, or FINRA, and said the survey responses "should put fear into all of us about the financial vulnerability of U.S. households," according to their blog post published today.
Here are more dismaying facts from their book, "House of Debt: How They (and You) Caused the Great Recession, and How We can Prevent It from Happening Again," and other recent financial security research:
quicklist:title: Do You Have $2,000?media: 23226588text:Mian and Sufi say a representative sample of 25,000 individuals were asked the question, "Could you come up with $2,000 if an unexpected need arose?"
While the majority of respondents said they were "certain" they could, the academics said it was "shocking" that 40 percent could not or probably could not.
quicklist:title: Wet on a Rainy Day media: 23225618text:Survey respondents were asked, "Do you have 3 months emergency funds to cover expenses in case of sickness, job loss, economic downturn?"
In 2012, nearly 60 percent of individuals did not have those funds to cover an emergency.
"The majority of U.S. households do not have the buffer they need to help them survive through such shocks," Mian and Sufi wrote online.
quicklist:title: Crowded by Debtmedia: 23225480text: When asked, "Do you agree with the statement: I have too much debt right now," more than 20 percent said they "strongly agree" they have too much debt.
quicklist:title: Debt and Vulnerability: Unhappy Couplingmedia: 23225535text:
"So households are extremely vulnerable to shocks, and many have too much debt," Mian and Sufi write. "Are these two patterns related? The answer is unequivocally yes."
By isolating the sample to individuals who say they do not have three months of emergency savings, and then seeing how many of these individuals say they have too much debt, the "grand majority" of people who say they do not have emergency funds say they have too much debt, the academics wrote.
"Remember that debt increases the vulnerability of these individuals. If they lose their job, they will still owe interest payments on their debt. Debt doesn’t disappear just because your income does," they write.
quicklist:title: How Much Have You Saved for Retirement? Hopefully More Than $1,000media: text:More than one-third of workers (36 percent) have only $1,000 saved for their later years, according to a new study by the Employee Benefit Research Institute last month.
Six of 10 workers report they and/or their spouse have less than $25,000 in total savings and investments(excluding their home and defined benefit plans), including the 36 percent who have less than $1,000, which is up from 28 percent just last year.
Total savings and investments increase with household income, education and health status, the Institute found.
Two-thirds (68 percent) of those with annual household income of less than $35,000 report having saved less than $1,000, compared with 23 percent of those with $35,000–$74,999 and 3 percent of those with $75,000 or more a year.
quicklist:title: You Should Save a Lot for Retirement media: text: In "The Charles Schwab Guide to Finances After Fifty," Carrie Schwab-Pomerantz, president of the Charles Schawb Foundation and senior vice president at Charles Schwab & Co., advises that you can withdraw 4 percent of your portfolio's value in your first year of retirement, increase that amount every year for inflation, and have a 90 percent level of confidence that you won't run out of money for 30 years (assuming you have money invested in a "mix of stocks").
In other words, your portfolio should be 25 times larger than your first year's withdrawal: $40,000 x 25 = $1 million.
"If that sounds like a lot, it is," Schwab-Pomerantz writes. "For many people it's unattainable. Of course depending on your own scenario, you may need less."
quicklist:title: Who Moves Up the Economic Ladder?media: text: The Pew Charitable Trusts released a report called "Moving On Up" that focuses on the importance of savings and wealth to help Americans move up the economic ladder. Economic security and economic mobility go hand in hand, allowing families with savings to possibly be better able to make human capital investments that promote income mobility, such as higher education or job training.
"The parents of those who moved up from the bottom quintile had almost double the median wealth ($30,733) of the parents of those who remained at the bottom($16,636)," the report states. "Parental wealth of those who made it to at least the middle, however, was only about $5,000 higher at the median ($28,253) than for those who did not make it that high."
A ten-fold increase in liquid savings was associated with a 5.5 times greater likelihood of also moving to at least the middle quintile