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Investment Gaps:
Half Have Retirement Accounts

Investment Gaps...
The average American may need around 80% of their working years income during retirement. Social Security often provides around 40% of the average American’s income. Pensions are becoming less common and usually replace less than half of a salary. Investments may be a good way to grow wealth over time to help boost purchasing power in retirement. Despite the income gap that some may be facing, many Americans do not have retirement investments.

About Half
Just about half of families own retirement accounts such as individual IRAs and
employer-sponsored accounts, such as 401(k)s. In addition to the gap in those who have and do not have retirement accounts, there are other uneven distributions in investment participation. For example, less than 40% of those earning lower incomes have retirement accounts, while more than 80% of families earning an upper-middle income do have retirement plans, and more than 90% of the highest earners have retirement accounts. Also, while less than a third of lower income families participate in the stock market, 70% of upper-middle-income families and more than 90% of the highest earning families own market investments.

Information Deficit
One of the main reasons many do not have retirement investments may be a lack of information. Potential investors may not have enough information about how investments might fit within their finances or to understand why stocks may be a good choice as compared to other assets such as real estate or commodities like gold. Many may even be apprehensive about the structure of markets and wonder if they are fair and trustworthy. Despite volumes of information available online, the in-depth knowledge of a credentialed investment professional may be helpful in filtering through potential data overload and aiding in understanding of how and why stocks may be a good choice for the average retirement investor. However, with only half participating in retirement accounts, it appears many do not take advantage of investment services.

Hedge Fund Effect
There may be many reasons why people do not work with finance professionals. One reason may be related to a lack of trust, which Aesop Advisor refers to as the “hedge fund effect”. With no experience working with investment professionals, films and media may comprise the majority of examples many have of the finance industry. However, movies and series tend to focus on highly risky, speculative, unethical, and illegal behaviors; which while entertaining, do not accurately represent the average retirement investment professional. The commonly-portrayed archetype of the greedy investor is often associated with hedge funds, and for many, the image of the shady hedge fund manager may influence their perception of investing. Although many may avoid working with finance professionals because of the hedge fund effect, in reality, because of their higher fees and exclusive availability to high net worth individuals, hedge funds are not typically used by the average retirement investor.

Top Thirty…
Besides a lack of trust that may be related to the hedge fund effect, even those who are interested in working with a finance professional may be prohibited by cost. Those who have an employer-sponsored retirement plan such as a 401(k) or 403(b) are responsible for choosing investments in their account themselves, unless they engage the services of an investment advisor on their own. Outside of employer plans like 401(k)s, firms that provide investment management services typically charge a yearly rate of one percent of the amount of money being managed. Traditionally, firms impose an account minimum of $100,000 to qualify for investment management services. However, only around 30% of households have $100,000 or more in assets not including their home, which means the majority of Americans may not be able to access professional investment guidance. Though in recent years, innovative finance firms have found ways to reduce the cost of investing for those who might not otherwise have access. Now there are firms that do not impose account balance minimums, allowing anyone to get started investing with any amount of money.

August 16, 2023

Markets Demystified is published the first and third Wednesdays of each month, and explores how stock market investing can relate to personal finance.

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