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Why Are Americans Falling for Retirement Illusions?

A new study reveals that nearly half of American households are at risk in retirement. Even worse, affluent households are more likely to overestimate the value of their assets. You may think you’re on track for retirement, but are you sure?

Why Are Americans Falling For Retirement Illusions?
Photo by Dario Kletecki

From Peter Reagan at Birch Gold Group

We’ve spent a lot of time discussing financial anxiety and planning for financial security quite a bit over the last few years.

Today, we’re going to shift gears.

Instead, we’re going to discuss affluent Americans who are confident in their financial stability and believe their savings are secure enough to weather any economic storm.

That sounds great, doesn’t it?

The problem is, a lot of them are wrong.

No matter how well-off, no matter how much they have saved, even the wealthy can misjudge their retirement readiness. It’s easy to overestimate the lifestyle their assets can provide in retirement:

More than one-quarter of all U.S. households think they’re on track to maintain their standard of living in retirement but are actually at risk of falling short

The affluent are more likely to hold this mistaken view.

Based on a very interesting report from the Center for Retirement Research at Boston College, we learn a few quite surprising things. The report focuses on a measurement called the National Retirement Risk Index (NRRI), which “measures the percentage of working-age households that is at risk of being financially unprepared for retirement.” The data go back to 2004.

What’s new this year?

the calculations show that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, roughly half of households are at risk of being unable to maintain their standard of living.

That’s right – roughly half of Americans are looking at a reduced standard of living in their golden years.

And a lot of them don’t know it.

So what makes even the wealthy overconfident in their retirement plans?

The “wealth illusion” explained

Affluent households own more assets than middle- or low-income households. This means that the net worth of the wealthy tends to grow or shrink based on general economic trends:

“The ones who worry me the most are the people who think they’re in good shape but they’re not,” said David Blanchett, head of retirement research at PGIM, the investment-management arm of Prudential Financial.

The booming [asset] markets may be giving a “wealth illusion” to affluent households that disproportionately own these financial assets, Chen said.

Here's a quick example:

In 2021, Anne bought an investment property in Hollywood, Florida. It’s very cute!

Hollywood, FL investment property

Anne's Hollywood, FL investment property. Image via Zillow.

She paid $450,000.

Today, based on comparable neighborhood sales, the same property has a market value of $799,000.

So, when Anne’s adding up her net worth and planning for her future, what’s the property worth?

Should she value it at the purchase price? At the market value? Somewhere in between? Should Anne feel $349,000 wealthier today or not?

In the same situation, people generally think of their most recent appraisal value as how much their property is worth. Think about it – if your home doubled in value over the last two years, wouldn’t you be mentally adding that to your net worth?

When the prices of the assets you own go up, don’t you feel better off? Even though your income and actual circumstances haven’t changed?

The famous Canadian economist John Kenneth Galbraith invented a term for this “psychic wealth.” He called it bezzle.

Essentially, bezzle is the difference between the actual economic utility of an asset and its market price. When asset prices go up, people feel wealthier which can lead them to act as though they actually are wealthier.

That’s exactly the sort of overconfidence the NRRI seems to be pointing out. And it also makes more sense that this sort of overconfidence would tend to affect the affluent households the most, because they own more assets than middle- and lower-income households.

It’s a fascinating concept, isn’t it?

But how does it help us determine whether we’re thinking clearly about our financial stability?

Illusions and reality

It’s important to know where you stand. The NRRI puts it this way:

…misperceptions can distort saving behaviors. Households that are not worried enough about their retirement income may not save enough even if they have the opportunity; households that are too worried may unnecessarily sacrifice their pre-retirement standard of living.

You can’t really know for sure whether you’re baselessly over- or under-confident about the future without clarity about where you’re at today.

There’s another complication: you can’t really know for sure how much tomorrow’s expenses will cost. Our dollars have lost a shocking 30% of their purchasing power over the last 10 years alone!

As I wrote earlier this week:

You can’t just think in terms of a certain “magic number” of dollars, after which your dream retirement will be guaranteed. Yesterday’s “plenty” is today’s “minimum” and, all too likely tomorrow’s “not enough.”

This makes a strong case for diversifying your savings with assets whose value rises as the purchasing power of the dollar declines.

Physical precious metals, specifically gold and silver, have been intrinsically-valuable stores of wealth for thousands of years. As tangible, finite resources, they can’t be devalued like currency. Because they’re physical assets, they can’t be hacked. Both have been considered safe haven assets for centuries thanks to their long-term stability and inflation resistance.

Diversifying your savings with physical gold and silver can help you see beyond the “wealth illusion” and focus on locking in your buying power well into the future.

Tangible assets like these aren’t available unless you have a special type of retirement account called a Precious Metals IRA. The good news is, just about anyone can get one and diversify money you’ve already saved with gold and silver. Learn more about the benefits of a Precious Metals IRA for free right here.

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