Savings Rate Concerns

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The U.S. Commerce Department recently announced that the personal savings rate across the country had risen to 5.8 percent in the month of February. The only positive bit of news in the report, however, is that the savings rate improved rather than declined. The Wall Street Journal’s Jeffrey Sparshott highlighted the fact that heavy snowfalls and otherwise poor winter weather in general is likely responsible for the uptick in savings. If you are unable to leave your house, it’s difficult to spend the money in your pocket.

The more troubling news is that the 5.8 percent mark is seen as a quality figure. The personal savings rate has fluctuated roughly between 2 percent and 8 percent for 14 of the last 15 years. Only in 2013 did the savings rate extend beyond that 8 percent threshold, cracking 10 percent momentarily. To be fair, interest rates and inflation have long played a role in our country’s savings rate. The personal saving rate was consistently above 10 percent during the 1970s due to high inflation. With interest rates at all-time lows for an extended period of time, the potential return on cash is not worth the effort, or so it appears to many Americans.

The savings rate, which is defined as the percentage of disposable personal income an individual sets aside for savings purposes, provides a glimpse into the current retirement crisis that is looming. Our economy is largely based on consumerism, which is why the Fed has suppressed its funds rate to near zero for the last six years. While that decision’s intention was to encourage spending to push the country through the Great Recession, its byproduct was a savings deterrent. We have a long history of out of control spending on an individual level when the economy is thriving, but people tend to wise up when the outlook is bleak by upping their savings rate. With the currently economic policy in place, boosting savings becomes that much more difficult with little to no incentives.

Most economists recommend saving at least 15 percent of your income to adequately cover your expenses in retirement, and that’s if you start early. A Morningstar report suggests that a 30-year-old earning $40,000 a year would only replace 60 percent of his income in retirement – good for $24,000 – with a 5.8 percent savings rate. That’s the same 5.8 percent that some economists praised when the Commerce Department released its report last week.

Greg

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