In Part I of this newsletter we stated that recent volatile markets seem to reflect consternation regarding potential rising U.S. interest rates. Although we believe that rising U.S. interest rates could put pressure on the currencies of foreign countries and hamper the slow global recovery, Darrell & King does not view a small and steady rise in rates as an unmanageable destabilizing force to the market or the economy. However, in Part I we did note that The Board of Governors of the Federal Reserve System (Fed) published a report in May 2015 titled “Report on the Economic Well-Being of U.S. Households in 2014.” We believe this report revealed some concerns and some positives below the surface of the U.S. economy and noted things that we need to understand when considering the current investment and economic backdrop.

The Fed based its “Report on the Economic Well-Being of U.S. Households in 2014” on its October 2014 second “Survey of Household Economics and Decision-making” (SHED). The SHED followed a similar survey in September 2013. The most recent SHED included a sample of 8,975 of which 5,896 completed the survey. The FED utilized the survey “in order to monitor the financial and economic status of American consumers.” With the survey the Fed explored seven categories:

  1. Overall Economic Well-Being
  2. Housing and Household Living Arrangements
  3. Banking and Credit Access and Credit Usage
  4. Education and Student Loans
  5. Economic Fragility and Emergency Savings
  6. Savings and Spending
  7. Retirement

In Part I, covering the first four categories above, we concluded that most of the findings seemed coincident with a low growth economic environment. We stated that our investment strategy appears in lockstep with this lukewarm Fed report. However, the final three categories of the SHED do appear more of a concern as we go forward because the average citizen appears ill-equipped to deal with his or her personal emergencies as well as retirement. The remaining newsletter may seem unrelated to your personal situation, but from an investment and economic standpoint, we all need to understand the makeup of that backdrop and what will affect it going forward.

It seems we have a savings and preparedness problem in the U.S. when only 45% of SHED respondents have an emergency fund that would cover three months of expenses. When that description broadens to include “borrowing money, using savings, selling assets, or borrowing from friends/family,” 66% of respondents said they could cover three months of expenses. Similarly, only 53% responded that they could “fairly easily handle” a hypothetical emergency expense that would cost $400 by paying for it “entirely using cash, money currently in their checking/savings account, or on a credit card that they would pay in full at their next statement (“cash or its functional equivalent”).” SHED respondents noted “a health emergency” as the most frequent economic hardship – 37%. Fortunately the prevalence of health insurance coverage appeared greater than we expected. (See Table 1 above.)

Health insurance does not tell the whole story though. One quarter of SHED respondents did not receive dental care in the last 12 months because they could not pay for it. For respondents with income under $40,000 annually, 45% report “that they had gone without some form of medical treatment” in the past 12 months as a result of cost. That number still amounted to 31% for respondents with income between $40,000 and $100,000. Likewise, for the respondents who could not cover a $400 emergency expense using cash or its functional equivalent, 47% of those people also avoided medical treatment as a result of cost. Health Insurance coverage alone does not seem to allow for the medical coverage that SHED respondents may need because 30% of “respondents who have health insurance report that they went without some form of medical treatment in the same period.” The Fed does note that it is possible that “some respondents who currently have insurance were uninsured at the point at which they were unable to afford treatment.” Nonetheless, in terms of Economic Fragility and Emergency Savings, the FED paints an unstable picture.

That lack of stability extends to Americans’ spending habits as well. Table 2, above, illustrates that 20% of SHED respondents reported spending more than they earned over the past 12 months. Additionally, among non-retirees, 30% of respondents reported saving zero money over the last 12 months. Of those who reported some form of savings, only 57% reported saving toward retirement. These figures imply that only 40% of non-retirees actually save toward their own retirement. That dynamic could pose a threat to our economy and our investment options going forward.

The Fed reported on Retirement last, but of all the categories affecting the economic well-being of U.S. households this might be the most meaningful in terms of future economic dynamics. Table 3, below, demonstrates that almost 40% of SHED respondents have given no or little thought to planning their retirement. Similarly, 38% of respondents’ retirement plan description includes either “I do not plan to retire” or “keep working as long as possible.” With that said, the overall numbers related to a “presence of any retirement savings” does not stick out as shocking. The SHED shows that 75% of sixty year olds and up do have some retirement savings, 77% of 45 to 59 year olds, 71% of 30 to 44 year olds, and 47% of 18 to 29 year olds.

That ray of light regarding retirement darkens when SHED respondents share their thoughts on retirement accounts. According to the Fed, 23% of respondents who have a 401(k) retirement account say that they do not know what portion of their salary they contribute. Of reasons why respondents do not invest in a 401(k), 403(b), thrift or other defined contribution plans from work, 42% responded that their employers do not offer a plan and 15% say they are unsure of the best way to invest the money contributed to the retirement plan. Fifty one percent of SHED respondents are either not confident or only slightly confident in their ability to make the right investment decisions when managing and investing money in their retirement accounts. Basic financial planning education seems in order for a large amount of the populous.

Another threat to SHED respondents’ retirement lifestyle comes from expectations regarding income sources. Sixty five percent of respondents stated that social security would be a source of funds in their retirement. Meanwhile “only 44% of those under age 30 say that they anticipate that Social Security benefits will be part of their plan to pay expenses in retirement.” Fifty four percent said that retirement funds would come from a work related defined contribution plan (e.g., 401(k)). Only 32% of respondents overall believed retirement income would come from a traditional defined benefit plan, which is in contrast to today’s retired respondents, 62% of whom have a defined benefit plan as a contributor to their retirement funds. So based on the previously discussed lack of retirement planning and this information about expected retirement sources, we note potential pressure as the non-retired respondents move into their retirement years. We find this especially true because 81% of responding current retirees had stopped working by 65, whereas, among working respondents, 56% expect to retire by age 65. We question what could cause such a shift in retirement age dynamics.

The future remains uncertain and some of the statistics reported in the Fed’s report regarding Economic Stability, Savings and Retirement appear startling. However, we believe that it would not make sense to panic now about some of these statistics. Just like the population analysis in the first quarter 2015 newsletter (, we have to be aware of it and analyze it in order to make a judgment about how it could affect our investments today as well as future investments. The biggest threat to the economy would come in the form of the population being so underprepared for retirement that we see a pullback in spending and a slower economic engine in the U.S. combined with the myriad social issues related to under-resourced citizens. We anticipate tracking the data and adjusting our investment views as we see how the dynamics of the Fed report actually develop over time. In general, we found the Fed’s “Report on the Economic Well-Bing of U.S. Households in 2014” informative and instructive in shaping our view of the economy and investment landscape.

As usual, thank you for your continued trust in protecting and growing your assets!