We’re supposedly in a new era of financial sobriety. Yet the evidence suggests otherwise. Amid the rubble of the 2008 financial crisis, there was talk of a return to thrift. For a brief period, it looked like it might happen. According to the Commerce Department’s Bureau of Economic Analysis, the monthly savings rate jumped to 8.1% in May 2009. But that proved to be a statistical blip, not a permanent change. To understand what’s happened, consider the longer-term story.
Over the 35 years through 1984, the amount saved as a percentage of post-tax income averaged 11.1% a year, and there wasn’t a single year when it fell below 9%. In the years since, the annual savings rate has never gotten as high as 9%. The drop-off was especially sharp after 1992, with the savings rate eventually hitting a low of 2.6% in 2005. Shaken by the Great Recession, Americans boosted their savings rate to 6.1% in 2009. But as the economy has mended, our inclination to save has waned, reaching just 4.5% last year.
For the overall economy, this isn’t a bad thing. If everybody turned thrifty, the reduced spending would slow economic growth. But for many families, it augurs badly for their financial future. How will they pay for retirement?
Sorry excuses. In the past, apologists for America’s lowly savings rate have offered their answer. In the late 1990s, it was supposedly OK that we weren’t saving because our stock portfolios were ballooning in value. In the early 2000s, it was our homes that were soaring in price.
Problem is, the bull market of the late 1990s and the housing bubble of the early 2000s were essentially borrowing gains from the future. Stock-market investors gave back much of their gains during the 2000-02 and 2007-09 bear markets. Homeowners surrendered much of their housing profits in the 2006-12 decline.
Over the short term, stocks, homes and other assets can rise faster than their underlying fundamentals. But over the long term, fundamentals prevail. In other words, share prices can’t rise much faster than corporate earnings, and bonds won’t deliver much more than what they yield when you buy them. Meanwhile, home prices shouldn’t climb much faster than the ability of families to pay. In fact, history suggests long-run home-price appreciation barely outpaces inflation.
Today, there isn’t much for apologists to point to. While home prices still seem reasonable, stocks are on the expensive side and bond yields are wretchedly low. It seems unlikely that another gangbuster bubble will bail out Americans.
No apologies. Americans, it seems, will have to bail themselves out — by finally knuckling down and saving more. For some, that isn’t currently an option, either because they’re out of work or they are still struggling to pay down debt taken on during the housing boom. But for those of us who aren’t in either camp, there’s no excuse.
Over the years, I have met thousands of everyday Americans who have amassed seven-figure portfolios. Many didn’t have huge paychecks, and most were so-so as investors. Instead, they shared one key attribute: They had great savings habits.
Are you gainfully employed and yet failing to save 12% to 15% of your income? Here are some steps that might get you on track.