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Savings plans increase, savings rates fall
by Don Kuehn
Figure this one out. Since the early 1980s Congress has designed a number of incentive plans to encourage people to save their money for retirement and for other good reasons. The traditional (deductible) Individual Retirement Account (IRA) now has prefix siblings named "education," "nondeductible" and "Roth."
There are 403(b) arrangements for certain public employees, 457 plans, 401(k) plans, Keough and SEP plans, and 529 arrangements for college savings.
With all these incentives, why has the savings rate among U.S. households been cut in half over the past decade? Savings rates are well below historical averages while personal bankruptcy rates are double those of 10 years ago.
In 1990, Americans saved 8.8 percent of their after-tax income. Today, the rate is about half that. Contributions to individual retirement accounts have dropped sharply as well. Just 18 percent of workers contributed last year. Many workers lack either private pension plans or 401(k) arrangements, and only 14 percent of those eligible put in the maximum allowed by their plans.
Provisions that became effective this year increased the amount anyone who is eligible can contribute to IRAs from $2,000 to $3,000. That will increase to $5,000 by 2008. After that, the limits will be adjusted for inflation in $500 increments. Savers over 50 are entitled to special "catch-up" provisions that allow them to add an extra $500 a year (through 2005) and then $1,000 extra starting in 2006.
Across the board, the maximum limits a person can sock away for retirement in federally authorized savings schemes have gone up substantially.
Without adequate savings, many families will have too little money to face their financial needs or to maintain an acceptable standard of living in retirement. Forty-seven percent of all workers, and 40 percent of retirees age 60 and over, have saved less than $50,000. In spite of expert advice that most workers will need 80 percent to 100 percent of their pre-retirement income to maintain their standard of living, in a recent survey 42 percent thought they could make it on less than 60 percent after they quit working. Wake up!
Here are a few reasons to try to explain this disturbing reality.
- There are many people who really believe that they just can't save any money. Yet more than 40 percent of American families make no effort at creating a household budget and of those that do, less than half stick to it. Fewer than half pay monthly credit card bills on time to avoid costly interest charges. Only 30 percent have shopped around for auto insurance rates in the past year.
I think there is a paralyzing fear among those who don't participate in the stock markets that is based on a perception of complexity and mysticism. After all, they have their own vocabulary on Wall Street and, oh yeah, they play with real money!
In past articles, I have mentioned several low initial-cost options for those interested in starting an investment program. For $50 a month or less, there are mutual fund families that will let you launch an account and get on the road to financial freedom. Check out the Mutual Fund Education Alliance at www.mfea.com for a list. You'll be surprised at the number available.
- There is a disconnect between our lifestyle choices and the consequences of those choices. How can you square paying $4 for a designer coffee, paying ATM fees rather than writing checks, carrying credit card balances, succumbing to pressure to sport the latest fashion fad or paying high cellular phone fees, with having no nest egg to support your lifestyle in retirement? I'm not suggesting that you have to live like a monk, only that you distinguish between "wants" and "needs."
While mentioning credit cards, the average U.S. household has balances of more than $4,800 on their cards. Assuming an 18 percent interest rate and a $125 monthly payment, it would take 23.3 years to pay off that debt!
- There is a general lack of investor education at many levels. Employers do a poor job of providing help to employees who have never had a chance to save or invest for their future. Our schools, by and large, have no financial education programs that teach children how savings, compounded interest, the stock markets or other basics of wealth-building work.
Eighty-one percent of parents who responded to the American Savings Education Council's 2001 Parents, Youth & Money survey admitted that they do a "poor" or "fair" job of managing their own money but still give themselves high marks when asked about the financial advice they give their kids.
When asked how they would advise their children to invest $5,000 though, only 42 percent included long-term investments like stocks or mutual funds that historically offer higher rates of return. Most (58 percent) suggested low-yielding bank CDs, savings accounts or savings bonds.
Parents miss out on everyday opportunities to teach their children about personal finance, whether it's a trip to the grocery store and a lesson on unit pricing, or lending a hand at balancing the family checkbook. Experts suggest that by the time children are in middle school, they should know the basics about saving, investing, earning, spending and giving.
"Parents need to start by becoming better role models," says Don Blandin, president of the American Savings Education Council (www.asec.org). "Figure out your values toward money and teach them to your kids. In the long term, they will realize at some point that being financially literate is just as important as learning to drive a car or burning a CD."
- There is a general misunderstanding of the scope of Social Security and the extent to which one can rely on that program alone for retirement income. Social Security supports millions of senior citizens, the disabled, and surviving spouses and children; it provides lifetime benefits; is indexed to inflation and has low administrative costs.
But Social Security was never designed to be the sole source of money to fund life in retirement. A comfortable standard of living should be built around personal savings (invested in things like IRAs and mutual funds), state retirement, private pensions or alternatives like 401(k) plans in addition to Social Security.
Because of the lack of knowledge about Social Security, some Americans don't understand the negative ramifications of the president's plan that would allow workers to invest in private accounts. I covered this in my February 2002 column, "The Social Security 'crisis' is a fabrication."
When the stock markets were setting records and corporate profits were soaring, it seemed that nearly everyone was calculating how soon they might be able to retire. Since the markets plummeted about two years ago, those calculations have, for the most part been put aside. Only 32 percent of workers say they have calculated how much they need to save for retirement.
There are several good Web sites that include retirement planners to help you calculate your retirement needs. You might try www.quicken.com/retirement/planner, www.fidelity.com/ (retirement & planning) or http://www.schwab.com/ (getting started).
Apparently, most Americans would rather not think about retiring when it requires some sacrifice, a modicum of planning and self-discipline to pull it off. Too bad. The same formula that applied when the markets were climbing at an annual 20-plus percent rate applies today: Pay yourself first, diversify your investments, allocate your assets according to a plan sympathetic to your tolerance for risk, and take full advantage of the tax-preferred investment vehicles like IRAs and 403(b)s.
Granted, it might take a little longer to build that retirement nest egg now, but the only way to arrive at your destination is to start the trip.
Don Kuehn retired from the AFT in January 2002. This column is intended to increase knowledge and awareness of issues of importance to members and retirees. For specific advice relative to your personal situation, you should consult competent legal, tax or financial counsel. Comments and questions are welcome and can be sent to dkuehn60@yahoo.com.
