In June 2005, the U.S. passed an ominous milestone when the personal savings rate - the average percentage of total household income that isn't being spent - went below zero. It wasn't long after that headlines about America's "savings crisis" appeared, with reports about how poorly prepared for retirement millions of Americans were and how our lack of thrift was jeopardizing our position as the richest and most powerful nation in the world.
Now, nearly seven years later, you don't hear nearly as much about the savings crisis. Why not? For one thing, the immediate problems for the U.S. and global economy - with sluggish growth, protracted high unemployment, and entire countries on the verge of bankruptcy - have overtaken our concern.
For another, Americans are saving more. The figures for December 2011 indicate we're saving about 4% of our income (Source: Bureau of Economic Analysis, 2012). But 40 years ago, the U.S. personal saving rate was around 10%; so the question is, are we saving enough? It depends on who you ask and what they're looking at.
National versus Personal Saving
There are two common ways that the U.S. Department of Commerce's Bureau of Economic Analysis (BEA) - the official keeper of such statistics - uses to calculate how much money we save. One is the personal saving rate, mentioned above, which only measures what consumers are doing. The other is the national savings rate, which adds in the difference between what government and businesses earn and spend.
It's the latter that some economists take issue with, because it excludes what government and businesses invest in education and research and development. While the BEA regards that as "consumption," there are economists who believe it is more rightly considered saving that leads to greater growth. Those economists say that true savings in the U.S. is higher - and healthier - than the BEA figures suggest.
Americans' Retirement Savings
For many, the savings crisis isn't a subject for debate among macro-economists as much as it describes the state of Americans' preparation for retirement. And again, there are divided opinions as to how much of a crisis we're really suffering. Here's what Barbara Dafoe Whitehead, director of the John Templeton Center for Thrift and Generosity, said in the New York Times last October:
"We face a savings crisis… Four out of five households have incomes of less than $100,000. More than a third of these households have no savings at all or savings of less than $1,000. Nearly half have savings of less than $5,000.
Financial experts tell us Americans should be saving more- a lot more. According to some estimates, households will have to save 20% to 25% of their earnings in order to provide for a secure future."
And then there was a recent survey by the Employee Benefit Research Institute (EBRI), as reported in USA Today:
"The data show that many workers nearing retirement age have saved nowhere near the amount they need, and many have very little savings. More than half of all workers, 56%, say they have less than $25,000 in savings. Nearly 30% of workers of all ages surveyed said they aren't confident they'll have enough to retire, the highest level in the 21 years that the EBRI has tracked the statistic. That means 36% of workers now expect to have to keep working after age 65, up from 20% in 2001."
The article went on to say that a 65-year-old retiree would need to have $1.1 million saved to draw $50,000 a year in inflated-adjusted dollars, assuming a 3% rate of inflation and investment returns of 5% a year.
A study released by the RAND Corporation last year, however, paints a different picture. The financial website MarketWatch.com had this to say about the RAND study:
"There's no retirement crisis at all. After years of warning folks that they haven't saved enough to fund their retirement dreams, we now know that it's a false alarm. For some, at least.
New research by two experts at the RAND Corporation shows that seven in 10 Americans age 65 to 69 are adequately prepared for retirement. Even after accounting for such big-ticket retirement risks as taxes, the death of a spouse, and out-of-pocket health-care costs, the odds are high that seven in 10 older Americans will be able to enjoy the same standard of living from the start of their retirement until the end of life."
Where Do You Stand?
So with this much disagreement on how much we're saving compared to how much we ought to be saving, what are we to think? The answer is that there's a better question: How well are you prepared for your retirement? Every household is unique, and there's no one formula or program that works for everyone.
With the beating that households have taken over the last five years in the stock and real estate markets, and with so many people at all income levels unemployed or earning far less, we know there are millions of people who need to take another look at their trajectory toward retirement. Please call if you'd like to discuss this in more detail.