Don't Go Broke 'Gradually, Then Suddenly'
NEW YORK ( BankingMyWay) -- In Ernest Hemingway's 1920s novel "The Sun Also Rises," the character Mike is asked how he went bankrupt. "Two ways," he answers, "Gradually and then suddenly."
If things keep going as they have been, that could happen to a lot of Americans over the next few years.
Two current news items make Hemingway's 1920s relevant today. First, the Census Bureau reported Wednesday that the typical American household's income has fallen to the lowest level since the late 1990s, continuing a four-year decline. Adjusted for inflation, average income is about $50,000 a year, nearly 9% less than in 1999.
In the second item, the Labor Department reported that in August wholesale prices had the largest one-month gain in more than three years, suggesting that higher inflation could be on the way.Both trends would seem to be gradual, with the damage mounting slowly over the years. But the effects can snowball quickly. To understand that, turn to another bestseller, Malcolm Gladwell's "The Tipping Point: How Little Things Can Make a Big Difference." Many changes, says Gladwell, happen gradually, then suddenly. A pot of water on the stove gradually gets hotter, then suddenly leaps into a boil. A virus gradually moves through a city, then suddenly becomes an epidemic. The same thing can happen with savings and investments. As wages gradually decline, people put less aside. And as costs rise, the money they save is worth less and less. As a result, more people retire with inadequate nest eggs. So, instead of spending their early retirement years living off their annual investment income, they must start spending principal, the nest egg that should produce those earnings and which, ideally, should be untouched for the first 10 or 15 years of retirement. As the principal gets smaller, the earnings shrink, forcing the retirees to take more from principal in the years that follow. The vicious cycle speeds up, until all the money is gone -- years ahead of schedule. The BankingMyWay
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