What Happened To Your Savings?

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The United States and its citizens are generally not known to be the world’s biggest savers, not for the last few decades at least. The current rate of savings is 5.5% in the United States. Other countries grab the distinction with savings in low double digits. While some may immediately get the impression that Americans simply love to spend their incomes for no good reason, that’s not quite the case.

While it’s true the American popular culture emphasizes a consumerist approach towards life there is also a much more somber reality to why savings in America are low. One aspect of this has been the rise in the cost of living, such as the price of groceries, fuel, utilities, insurance, and rent. In addition, declining production in the United States over the past decades has contributed to an increase in unemployment, for many permanently.

Average Savings Are Too High

There is an old statistics/economics quote that whenever I hear the word “average” I always visualize:

If you have one of your legs in a bucket of boiling water and the other leg in a bucket of ice water, on average, you are comfortable.

The average retirement account balance in the United States is about $95,000 for the average working age American. There are two things to keep in mind when you see that number. First, that number is an average. Second, it falls short, significantly.

If you have one person in the United States that has $200,000 in savings, and the other individual has zero, on average, that is $100,000. That is about where the average of the United States is. Unfortunately, that does not show the real story.

In the United States, we have what could be called “super-savers,” individuals who throw the averages off significantly. If you have one individual who has $1 million in savings, and nine people who have zero, then on average these ten people have $100,000. That is what the real story looks like in America. Many fall way short in retirement savings.

Where Are All The Savings?

The CEO of Assurant (provider of insurance products) in an interview to Bloomberg recently stated, “The reality is, half of Americans can’t afford to write a $500 check.” The typical American household is still earning 2.4% below what they brought home in 1999, when income peaked.

According to a BankRate survey, unfortunately, only about four out of 10 Americans said they had enough in savings to cover a surprise $500 expense. Another 21% said they would rely on a credit card, while 20% said they’d cut back on other expenses. Another 11% said they’d turn to family or friends for the money.

The average personal income in the United States is $44,510 as of 2015. Most Americans earn less than that however. In fact, 70.23% of Americans fall into this category, earning less than $50k. 20.62% earn from $50k – $100k. The rest, only 9.15%, earn above $95k.

These numbers show the wide distribution of income in the United States. Most Americans simply do not earn enough to get by. In fact, 7 in 10 Americans have less than $1,000 in savings at any given time throughout a year. Since their earnings are below average, most of the expenses come in the form of basic necessities: food, rent, transportation.

Why Are Savings Being Eroded?

While in the short-term it is a significant boost to the economy when consumers purchase, if these purchases are funded by a continued increase in earnings and stable or increasing savings then that is positive for future consumption. However, if this consumption continues through a decline in earnings or in savings or through an increase in debt, then this creates an unsustainable trend in the long-term, one that would require the economy to contract. Nothing can go on indefinitely.

The other very important factor to understand why savings are eroding is interest rates. As we have written extensively prior about how the economy works:

…labor and wages adjust with the current level of production and consumption. As wages increase (or decrease), the market rate also is affected with more or less availability of funds for lending.

All those different variables (consumption, savings, market rate, labor market and wages) interact together leading to a healthy business cycle and economic growth.

However, instead of allowing the economy to function as a self correcting mechanism, throughout history governments have attempted to stimulate continued economic growth despite the unavailability of savings, through the creation of currency and the artificial simultaneous reduction in the interest rate, thereby artificially fueling demand and the illusion of a population that has a large amount of savings to fund future growth.

These actions by central banks and governments create unsustainable artificial periods of economic growth, only to be followed by a very real economic contraction that has far reaching generational consequences on the population, something which happened following 2008.

Or stated another way, the theory of the supposed “wealth effect”:

The theory behind interest rates being lower than they otherwise would be without central bank actions is that this creates increased demand for economic components (such as consumer goods), driving asset prices higher and creating a wealth effect, or an increase in job growth which would spur income and further demand in a self sustaining manner.

The concept of the “wealth effect” is that if your home increases in value (on paper) that your propensity to consume will increase (as you start feeling more wealthy) and you will start spending more.

The wealth effect and the whole reality of artificially creating economic demand misses one key point: If people do not have savings, and we know that asset prices cannot increase in any direction indefinitely (up or down) then what happens afterwards, when either artificially induced government demand stops, or people’s propensity to consume disappears as a function of not having savings or being maxed out on all debts?

The irony of all this economic theory is that it is not sustainable in practice. Low interest rates creates a disincentive to save since the return on investment is so little. Therefore, in the short-term people’s propensity to consume increases. Additionally, people engage in reckless investing decisions, otherwise known as “searching for yield”, that otherwise would not be economic if not for the illusion created by government edict. However, when the economy requires a correction due to unsustainable policy choices, and the average person in the United States has no savings or is invested in uneconomic investments that are not sustainable, the consequences of these policy actions will be devastating on the economy, not for a few short weeks or months, but possible for years or decades. Such are the consequences of creating systemic imbalances and attempting to influence behavior in one way or another.

Do I Have Enough To Retire?

The recommended amount of savings for retirement is 10-times your annual salary. If the median income in the United States is $57,716.00, then the recommended retirement savings would be $577k. As it turns out, most Americans are not saving or are unable to save for retirement. On average, most in the U.S. have only about $95,000.00 at retirement age, 1/5th the recommendation – falling well short.

But, it is even worse than that. At retirement age half of Americans have no savings whatsoever. These individuals will need to rely entirely upon the social welfare programs in their “golden years”. However, Social Security has no ability to support these individuals and provide them with a sustainable prosperous lifestyle if relying solely on the Social Security Income. An average Social Security check is $1,406.58 per month, as of December 2016.

Not only that, but there is a serious threat to the solvency of the Social Security program; it is believed to be near bankrupt.

How To Save Money?

It is important to realize that the economy functions in waves and cycles. As such, it is important not to simply diversify for the sake of diversifying, but to allocate your savings in asset classes that are undervalued, not overvalued. If you are wondering if the stock market is undervalued or overvalued, you can read this article. Consider alternative investment options. Keep in mind that the most effective way to preserving capital and increasing it is to buy low and sell high. This requires you to be a contrarian during times in history when being one is considered silly or stupid. However, it is important to note that simply investing in contrarian ideas does not by itself provide you with a basis for success. It is vital to understand how the economy works, what money is and isn’t, and from that extrapolate the risk reward of investment opportunities.

The best way to save money is to invest in the #1 Guaranteed Risk Free Investment. A dollar saved is a dollar earned.

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