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The Decline in the Personal Savings Rate - What Happened to the Discipline?
by Tome Tomaj
More Economy Articles
Published on this site: December 16th, 2009 - See
more articles from this month
As more and more American baby boomers are nearing and entering
their retirement years, many of them are concerned about whether
their retirement savings will last them long enough to ensure
their current quality of life, and rightly so.
During my work as an investment advisor and in my travels and
contacts with people in all facets of life, I have seen
first-hand how the lack of savings by Americans for their
retirement can lead to disastrous effects, both on their
financial situations, but on their emotional well-being as well.
The data speaks for itself. According to the Organization for
Economic Co-operation and Development (OECD), the net household
savings rate as a percentage (%) of household disposable income
for the US in 2008 was 1.6%. That is to say, that on average
American households saved only 1.6% of their disposable income.
As compared to other developed nations, the US has a very low
savings rate. As a reference, the savings rate for some of these
developed countries is as follows:
- Germany (11.6%)
- France
(12.7%)
- Italy (9.2%)
- Switzerland (12.6%) and
- Japan (3.3%).
As Americans, why do we not save more of the money we work very
hard to earn? I firmly believe this is a result of our lack of
financial discipline. What I mean by lack of discipline is as it
relates to making the right decisions as to our lifestyles,
spending decisions and to a lesser extent our careers.
Here is an example: As an advisor, I frequently meet and consult
with wealthy individuals and many, to my surprise, have earned
their wealth on their own. It was not handed to them by their
parents. After meeting and working with affluent people, I
immediately began to notice similarities between many of them.
- They were savers. They saved a much higher percentage of their
disposable incomes as compared to the average American.
- They live well below their means. I cannot stress this enough.
The most common characteristic of these individuals was they were
not concerned about "Keeping up with the Jones," but rather
live a relatively conservative lifestyle, focused on achieving
financial independence.
Naysayers will argue that while these are valid points, these
individuals were lucky enough to have good high-paying jobs. Iwould agree that a stable high-paying career is definitely a
significant component in helping achieve financial independence,
but do not believe that this factor, and this factor alone, helps
individuals achieve this independence. There are many many
individuals with high paying jobs, many of them in stable
positions, but living paycheck to paycheck. This lack of
discipline on the part of these individuals can at a minimum
leave ill-prepared for their retirement, or worse in the long
run, possible financial ruin.
As I write this article, I am reminded of something that my
father used to say all the time (and still does, although to a
lesser extent) - "It doesn't matter how much you make, but how
much you save." As a young guy, when I was working in investment
banking, this advice went "in one ear and out the other." But
as a guy in my 30s I really appreciate this line of thinking and
how it can really affect Americans for the better.
Consider this: the effects of saving $500 per month and investing
those monies have a very large potential for growth in the long
run. Assuming an 8% average return on investment, by saving $500
per month, in 5 years it grows to $40,000, 10 years -
approximately $100,000, 20 years - nearly $302,000 and in 30
years - approximately $740,000. The effects of compounding still
astonish me to this day. If a 30 year old individual starts
saving $500 per month today and does so for 30 years, and
retiring around the age of 60, he could have a very nice nest egg
in addition to his social security income (if it is still around
in 30 years), his pension plan (from his employment, and or 401k,
if applicable).
Now for some more recent data (which is not very meaningful, in
my opinion). The US Bureau of Economic Analysis recently reported
that the US savings rate as a % of disposable income has been
increasing over the last few quarters. In fact, from the first
quarter of 2008, the savings rate has been increasing to
approximately 4.5% as of the third quarter 2009. While, in my
opinion, this is good, I believe this will not last. Data has
shown that during periods of economic downturns, we see savings
rates increase dramatically, only to see them fall once the
economy begins to come back. If we continue saving just a little
more than we have been saving on average, it could make a
meaningful difference in the long-term financial health of many.
I am a firm believer in saving, especially as it pertains to
retirement and allowing the possibility to enjoy retirement years
in relative comfort. The purpose of this piece was not to
criticize us as Americans on our lack of financial discipline as
it pertains to saving, but to show us that many of the financial
difficulties people face in their retirement years can be avoided
with some careful long-term planning.
Tome Tomaj is an investment advisor representative and a
financial markets investor. He is the founder of White
River Capital Management LLC, an independent registered
investment advisor. White River specializes in the management
of separately managed investment accounts for individuals and
institutions. To find out more about his investment philosophy
and sign-up for his FREE market commentaries and articles,
please visit:
http://www.wr-cap.com/signup.html.
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