The US savings rate has been negative for the last year. While there are disagreements about the methodology used to determine US savings, three studies from the first half of 2006 indicate Americans don't save enough and are poorly prepared for retirement.
The US savings number comes from the Bureau of Economic Analysis' Gross Domestic Product report issued every quarter. Economists determine savings as Gross income less all expenses for a particular time period. In other words, savings is what is left over after someone purchases all their stuff. This calculation assumes that people only save after they purchase everything; it does not include pre-expense retirement packages. However, an analysis of the retirement fund tables from the Federal Reserves'
Flow of Funds report indicates retirement savings is at best 3% of GDP over the last 5 years.
In addition, three studies from 2006 indicate the US is facing a savings crisis. The first is from the FDIC, which concluded:
Although 94 percent of families headed by persons ages 45 to 54 held at least one type of non-real-estate financial asset in 2004, the median holdings of financial assets for this group were only $38,600.12 These data include 58 percent of families that held a median of $55,500 in retirement accounts (which include individual retirement accounts or IRAs), but only 18 percent that held the next largest asset category, pooled investment funds ($50,000). Even fewer--less than 7 percent--held the third and fourth largest asset categories, other managed assets and bonds ($43,000 and $30,000, respectively) (see Table 3, next page).13 For the average person, financial assets would not last long in retirement.
The second study is from Boston College which was just released. It concluded:
Almost one in two American families are headed toward years of financial struggle in retirement, according to a recent report that says workers are unprepared for cuts in pension and Social Security income.
The Boston College study presumes that most people need to replace 65 percent to 85 percent of their annual income in their working years to stay secure in retirement. But 43 percent of U.S. households will fall at least 10 percent short of that range, the study found, using what it said were conservative projections.
The percentage of households at risk of an insecure retirement rises to 66 percent under a less rosy set of assumptions--for example, if workers retire at age 63 instead of at 65.
"Unless Americans change their ways, many will struggle in retirement," said Alicia Munnell, director of the study and a former member of the White House Council of Economic Advisers. "The answer is saving more and working longer."
And finally, there is this study from the Employee Benefit Research Group: It found that 63% of people have less than $100,000 saved for retirement. The paltry savings levels reported in the Flow of Funds report backs-up this fact. $100,000 is clearly insufficient to provide for income for a 20-year period, even with social security.
The bottom line is the upcoming retirement of the baby boomers is not going to be the great traditionally accepted notion of retirement. Get ready to continue seeing grandma and grandpa as Wal-Mart greeters.