Counterparties: How to save, America
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com
Saving money — everyone hates it. Americans spent the period between the early 1980s and the financial crisis failing miserably at saving. In 1982 Americans saved 10.9% of their income; by 2005 the savings rate had fallen to just 1.6%.
Since the financial crisis, personal savings have rebounded, hovering between 3% and 5% ever since. But this relatively new boost in Americans’ savings, it turns out, is not equal opportunity. Nearly 30% of households don’t have access to a savings account, according to a FDIC report released this week. Another recent report suggests 28% of Americans have not saved anything at all.
The IMF has a new paper which looks at the relationship between income inequality and savings in America. (The gap between America’s rich and poor hit a 40-year high in 2011). “Lower income growth,” the authors write, “was linked to the drop in saving rates and growing indebtedness of American families”. The authors argue that without higher home prices or growing incomes, Americans are still not saving enough to fix their post-crisis financial situations.
Keyu Jin, who looks at the differences between Chinese and US savings patterns, finds big generational gaps in US savings: “the fall in savings in the US is largely due to higher borrowing by the young (rather than a fall in middle-aged Americans’ savings rate)”. Middle-aged Americans, Jin writes, actually increased their savings, relative to GDP, from 1992 to 2009.
If you’re worried that you’re not saving enough to keep up, the bad news is that you’re probably right. The rule of thumb says that you need to save at least eight times your final annual income to pay for retirement.
The good news, however, is that saving more is pretty much all you have to do. James Saft points to a new study by Putnam, which has an interesting conclusion: simply saving more and funneling it into your retirement account earned better returns than magically trying to pick the best funds or perfectly allocating your assets. — Ryan McCarthy