End of an Era? Personal savings on decline

According to the latest available figures from the U.S. Bureau of Economic Analysis, the national personal savings rate for the month of November was -0.5 percent.

The picture is brighter on a year-to-date basis. For the first 11 months of 2007, the national savings rate was 0.5 percent. Year-end figures will be released Jan. 31.

The savings rate measures the percentage of disposable personal income available left after expenditures on personal consumption, interest and net current transfer payments. The bureau says that a negative personal savings rate indicates that Americans are spending more on personal consumption than they have available. At the current rate, for every $100 in disposable income, Americans are spending $100.50.

Some financial planners say the result of that spending could be disastrous down the road.

“For those between the ages of 25 and 55, in my opinion, it’s certainly the minority that is saving diligently – the majority is living paycheck to paycheck,” said Troy Kennedy, chief marketing officer for Springfield Trust & Investment Co., citing recent increases in foreclosures and bankruptcy rates. “They’re just spread so thin.”

Long time coming

According to many advisers, the decreased national savings rate is a trend that has been building for decades.

“The baby boomers have been quite consumer-minded, and as a result, we’re seeing the next generation be consumer-minded, but to the point that they’re going in debt to purchase items,” adviser Eric K. Peterson said. “We’re close to $1 trillion, as consumers, in debt – for credit cards, mortgages and the like.”

John Wilson, regional president for U.S. Bank in Springfield, said the reason for the lack of savings is largely generational.

“The oldest generation that may have grown up in slower times – even the Depression – remembers when things weren’t so good, and they save for a rainy day,” Wilson said. “But it’s been a while since it’s rained.”

In fact, the last time Americans had a negative savings rate for an entire year was in 1933, the last year of the Great Depression, Peterson noted.

On an annual basis, with a 2006 savings rate of 0.4 percent, the picture isn’t quite as bleak. Dwight Rahmeyer, CEO of Trust Company of the Ozarks, said the United States has always had a lower personal savings rate than other countries in the developed world. Consumers in Japan, for instance, have saved more than 20 percent of their disposable income each year since the early 1980s.

Rahmeyer said the low personal savings rate could be partially attributed to the fact that the rate only looks at bank savings – such as savings accounts and certificates of deposit – but doesn’t factor in retirement savings such as 401(k) contributions.

“Most people don’t carry large (bank) balances,” Rahmeyer said. “If I put a few dollars per paycheck in my 401(k), I would think of that as savings. But it’s not classified that way because it turns right around and is invested in stock, bonds or a money market. It’s not in a savings account at a bank.”

Saving less

Also affecting the national savings rate is a decreased dependence on traditional bank-based savings accounts.

Bankrate.com’s Financial Literacy 2007 report found that 54 percent of Americans did not have traditional emergency savings funds, equal to three months’ living expenses.

One reason for the decrease, Kennedy said, is the increased availability of instant credit through the use of credit cards and home equity lines of credit.

“If people have a home equity line for $50,000, and their monthly expenses are $5,000, they think they have 10 months of emergency funds on hand,” Kennedy said. “But that’s not accurate – you have to pay for that.”

Adviser Eric K. Peterson said people also are increasingly borrowing from their retirement plans, both for emergencies and for large purchases – but he doesn’t recommend it.

“People mistakenly feel that if you take a loan out on your retirement plan, you’re paying yourself the interest,” Peterson said. “That’s true, except that money is taken out of growth-oriented investments, which is where it should be, to fund here-and-now wants as opposed to future needs.”

Another possible reason for less saving is the so-called “wealth effect.”

Kurt Kunze, economist with the BEA, said the average person’s net worth has gone up considerably in the last 20 years, due to increases in the stock and real estate markets.

“One suggestion is that when people make their purchasing decisions, they look at their assets,” Kunze said. “If their asset position looks good, they’re liable to spend more of their current period income.”

At U.S. Bank, where interest rates for savings accounts as of Jan. 7 were 0.2 percent on the low end and 3.75 percent for high-end money market accounts, Wilson noted that when it comes to saving, most people are practical.

“They’ve seen the stock market rise and real estate returns rise much faster than savings, so they’ve shifted their savings to other venues,” he said.

‘Pay the piper’

Advisers agree that a decreased propensity to save could have serious consequences.

Using credit as an emergency fund, for example, may seem like an easy fix, but Rahmeyer warned that there is a catch.

“You do have to pay the piper, and that’s where a lot of people get in trouble,” Rahmeyer said. “To a certain extent, if that’s your emergency plan, that’s clearly a false premise. The problem is, if you don’t have the funds now, what’s going to be different in two or three months?”

Peterson said he encourages all of his clients to have an emergency fund in place.

While Bankrate.com cites three months’ expenses as the traditional savings amount, conventional wisdom used to call for six months’ expenses kept in the bank for emergencies.

Either way, Peterson said he recommends his clients make saving a habit.

“If you don’t have three months, get three,” he said. “Once you have three, try to get to six. Maybe I’m old school, but I think it makes good sense to have those dollars set aside for emergencies and opportunities.”

Kennedy added that, whether saving for an emergency or for old age, success depends on a major shift in how people think about money.

“People are neglecting their retirement, and they’re neglecting their emergency fund. They get an extra $100 and instead of sending it to their mortgage, they’re going out and buying clothes,” he said. “We see it as a huge cancer moving forward that the younger generation hasn’t been taught about saving. It’s going to be a large burden on our economy.”

Figuring the personal savings rate

Kurt Kunze, economist with the U.S. Bureau of Economic Analysis, said the personal savings rate is a case of solving by subtraction.

“We start with income and we subtract out personal current taxes – mostly income taxes – to arrive at personal disposable income,” Kunze said. From there, the bureau subtracts other monthly expenses, such as regular bills, other purchases and payments to 401(k) accounts or other retirement savings vehicles, to arrive at the personal savings rate.

Opportunities to plan ahead

While the national savings rate doesn’t include those who put back money regularly for retirement, Springfield financial adviser Eric Peterson said the government has made it easier in recent years to save for the long term.

Contribution limits to 401(k) accounts and individual retirement accounts have increased – the 2008 limit for each is $5,000.

He said the reason is the government’s realization that federally funded retirement assistance – Social Security, Medicare and Medicaid – will not have enough to fund everyone in the future.

“All of this is the government trying to make it as easy as possible for people to save dollars, because the government is telling us they can’t put it in for us and there aren’t going to be enough people to support Social Security,” Peterson said.