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Income analysis shows widening gap

As Americans continue to climb out of the worst economic downturn since the Great Depression, many experts are taking note of a widening gap between the "haves" and the "have-nots."

Federal income data over the past 20 years show a growing divide in income among all age groups. Bankrate's analysis of the data reveals that the 65-plus age group has the widest income gap. But the income gap is growing fastest among 35- to 44-year-olds.

Average incomes in the U.S.
The yawning divide shows one-fifth of American households earning $11,490 annually on average; the next fifth earning $29,696; the middle tier earning $51,179; the next rung up, $82,098; and the top tier, $181,905. Top 5 percent of American households earn $318,052 on average.

The bigger the income gap in a group, the greater the disparity between rich and poor. The gap can grow if there's an increase in population of high earners, for example, and it can grow if there's a rise in the number of poor people. It can also be a combination of both.

The income gap and the wealth gap are two different measures of the divide between the rich and poor, and both have an impact on the growing chasm. Wealth is often the result of stock market and home equity gains, in addition to income. Wealthier investors who were able to sock more into the stock market have grown much richer since the recession, according to Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. Gains in housing values also boost wealth and affect a larger share of the population than stock market gains, he adds, yet the housing market is recovering at a slower pace.

An anemic labor market stifles economic growth and has been a major contributor to both the income and wealth gaps, says Snaith. When people are unemployed or underemployed, they not only stop investing, they stop spending. Because consumer spending accounts for a big chunk of the economy, it has a potentially enormous ripple effect. "If you look at consumer spending, it's been on a downward trend all year," he says.

The fastest-growing income gap

The prime earning years for most people -- when they're in their 30s and 40s -- are also the most important when it comes to setting up a future position on the wealth spectrum. As the Bankrate income analysis shows, the fastest-growing gap is among those ages 35 to 44. So, while some are quickly advancing toward becoming rich, others are just as quickly falling behind.

Increase in income gap from 1992 to 2012
The government's Current Population Survey, conducted in March, broadly interprets income to include all earnings, unemployment compensation, Social Security income, disability benefits, alimony, interest, dividends, rents and royalties. Bankrate measured the income gap by age group with the help of Mark Burkey, a professor of economics at North Carolina A&T State University.

"This age group is in a kind of transition period, going from establishing themselves in their careers to that next level," says Jason Flurry, president of Legacy Partners Financial Group. "They've lived a little, but they're not really mature at this point and if they have kids, a lot of their money gets eaten up in just maintaining their lifestyle." It's a critical financial point, he adds. "If you handle that period well, it sets the course for the next decade; if you don't, in many cases you can't recover."

Lauren Prince, Certified Financial Planner at Prince Financial Advisory in New York City, says there's another factor working against this age group. Often, they've achieved middle management positions in their chosen careers, yet that sector was hit hard in the recession. "People reach middle management in their 30s and 40s, but technology is replacing them to the point where companies are making do with fewer people."

People in this particular age group have taken hits in both income and wealth, says Snaith. If they purchased a home just prior to the recession, they probably lost more home equity during the housing crash than an older homeowner who purchased 30 or 40 years ago. "They're more likely to be recent homeowners and more likely to be underwater on their mortgage," he says.

As far as income goes, workers in their 30s and early 40s who have achieved a midpoint in their careers might have been pushed down a rung or two on the income ladder, Snaith says. Or, they might have been forced to take jobs they wouldn't otherwise take. "Many of the new job opportunities are focused on the service industries and are typically not high-paying," he adds.

"The labor market improves each month, but the pace is still underperforming, and for those in the phase of life where expenses are high, it could be tough to climb back up the ladder," says Snaith.

The good news is that there is still time to recover financially before retirement. Snaith believes this generation is going through a stage of "mini-austerity" since being financially whacked by the recession. They're generally more careful about how much they spend and are less likely to max out their credit cards, he says.

Some move up, some fall behind

A recent study by Pew Charitable Trusts found that economic mobility heavily depends on whether or not people grew up poor. Even though 40 percent of Americans believe in the economic value of hard work, 43 percent of those raised in the bottom quintile of the income ladder are stuck there a generation later and 70 percent never even make it to the middle rung, according to the study. A paltry 4 percent succeed in a "rags to riches" progression, attaining the top income levels.

The Pew study collected data from 1968 to 2009, following households over time. Researchers compared adults in their prime working years with their parents when they were at the same point in their lives, according to Diana Elliott, Pew's research officer on economic mobility.

"What we found is that while 43 percent stay stuck at the bottom, some move up. This study explores what differentiates upward economic mobility," she says. "College education, race and dual-income households were among the most important factors."

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