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Hooray for the Low Savings Rate!

Hey, did you hear the good news? Americans aren't saving squat!

According to the Bureau of Labor Statistics, the savings rate in January was a negative 0.7% -- that is, the average American household spent 0.7% more than it made.

I'm not going to get into whether the savings rate is an accurate measure of American household wealth; whether it is or isn't, the savings rate has been in a steady decline since spending most of the 1970s above 10%. We've now had a complete year of a negative savings rate -- the first time since the Great Depression.

And I say ... woo-hoo!

Spendthrifts drive the economy
Do you know how much of the gross domestic product is attributable to consumer spending? A whopping 70% ... or so the economists tell us. I've never counted all of those pennies myself.

But I do know what would happen if each American household starting saving 10% of its income. Home Depot would sell 10% fewer hammers and saws. Dell would sell 10% fewer computers. Ford would definitely see its sales slide. (I suspect that the likes of Altria and Anheuser-Buschwould be fine -- their customers always find room in the budget.)

Generally speaking, revenues for American businesses would drop 10%. And what could happen when revenues drop? Stocks drop, and unemployment rises.

But the good news is, Americans aren't going to start saving that much. Why is that good news? Because if people don't save enough, then they won't be able to retire. (Since the typical American has less than $50,000 stashed away for retirement, it will take a lot of saving to catch up.) Which means they'll have to do something horrible ... unthinkable ... deplorable ... they'll have to keep working, which has all kinds of benefits:

  • They'll keep putting money into the stock market, rather than taking it out, which is better for stock prices.
  • They'll continue paying FICA taxes, which should help the Social Security and Medicare programs.
  • It'll prevent the coming "brain drain," the supposedly looming labor shortage that'll occur when all those talented boomers retire, with not enough busters, X'ers, and Y'ers to fill their shoes. Those boomer brains won't drain, however, if they find they still need a paycheck to pay the bills.

I'm not an economist, so I'm sure the practitioners of the "dismal science" might have a few things to say about my conclusions. And they will also say that a low savings rate is bad for our economy, since savings provide the capital for future growth. After all, if Americans increased their savings rate by 10 percentage points and put it in the market, stocks might rise.

But listen to what Ken Dychtwald, author of The Power Years, told me during an in interview for my Rule Your Retirement newsletter:

Retirement is bad for the economy. When people retire, they grow more frugal. They grow more conservative in their investment portfolios. So if we were to imagine the largest generation in history -- who have spent the past few decades buying cars and toothpaste and watches and stereos and luxury vacations at a voracious level -- retiring on their 64th birthday and never working again, then the equity markets and the consumer markets would go into a death spiral.

Scary stuff, huh? But it's not so scary if people keep working -- either because they have to or because they want to. Here's why Dychtwald thinks the "doomsday scenario" won't happen:

If people work longer, if they continue to spend, then you'll see a surge for decades in the economy as a result of people reaching their power years. There's plenty of time. Some boomers are 59, but an equal number are 43. If we have a more productive maturity, if we give more, if we earn a bit longer, then the story turns out quite spectacular. Then this becomes a time of awakening, not a time of collapse.

Being extraordinary
So without enough savings, Americans will have to keep working, keep producing, keep contributing. That's not so bad, is it?

Unless, of course, you don't want to work forever.

And this, dear Fool, is where you set yourself apart from the typical American -- you become extraordinary. You do it by having a retirement account. (Most Americans don't.) Heck, you should have a few, since each type has its own benefits.

And you become extraordinary by actually (shhhh, don't tell anyone -- you'll seem so un-cool) saving. Plan your financial independence, and make sure you'll have the means to pay for those ends. Then, when you reach your "power years" (as Dychtwald calls them), working is a choice, not a requirement.

Have a plan for how you'll make the most of your power years? Take a 30-day free trial ofRule Your Retirementand get full access to past issues, special reports, and an online financial-planning tool.

Anheuser-Busch, Home Depot, and Dell are all Motley Fool Inside Value recommendations. Dell is also a Motley Fool Stock Advisor pick.

Robert Brokamp, who owns shares of Home Depot, does not want corporate America's revenues to drop 10% -- but he does think Americans should save much, much more. The Motley Fool is investors/spenders writing for investors/spenders.


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