August 5th, 2005


U.S. Savings Rate drops to near 0

I heard this on the news this morning - people are saving less than at any time in the past few years. Which, I suppose, is news - but we've never really saved much anyway. I don't know what the maximum in those same past few years was, but it certainly wasn't the 10% of our pre-tax salary that the financial advisor was recommending as a minimum. He went on and said it'd be better if we saved 20%.

To which, I add the following financial observation: Duh.

He went on to say that the 10% figure was based on a "three legged stool" of personal savings, corporate pension plans, and social security. Since corporate pension plans are practically history, the advisor suggested a 20% savings rate. I look at that and say that I don't trust social security that much - should I be saving 30%?

One thing that disturbs me about this whole discussion is that at least some people who get to make up financial statistics draw a distinction between "saving" and "investing". If you maximize your 401-k and contribute monthly to an IRA, that may or may not constitute "saving", depending on who you talk to.

But, for purposes of this discussion, let's say that investing counts, and let's assume that my investments return a stable 10% annual return (which is more stable, yet lower, than what I think is reasonable). If I continue contributing the maximum to my IRA, and increasing my monthly investments beside to reach 10% of my pre-tax salary (today's salary, not the one I ought to be getting), I will hit a million dollars of liquid assets by the time I'm 59. That's not counting the value of the house (which I would probably want to pay off before retirement). If I saved 20% of my pre-tax salary, I reach that same (somewhat arbitrary) retirement dollar figure at the age of 54.

This isn't really intended to be an exercise in self-adulation, nor am I hoping that those of you with green eyeshades and sliderules will go out and figure out what my salary is today and how poorly I've been saving up to this point.

Instead, perhaps I can encourage you to open up Quicken and take a look at how you're doing. Think about "what does retirement mean to me?". Are you going to reach your goal in your lifetime?

For me, my image of retirement is to be able to work on projects that need only to amuse myself. And, if I can delay that heart attack until age 60, I should be OK.

Discuss in the comments, or not.