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“You can be young without money, but you can’t be old without it.”
— Tennessee Williams, American Playwright
I read this quote the other day, and it really struck me. On the radio, I constantly hear reports about the next wave of government employees that have resigned or plan to retire by the end of this year. The GAO reports that more than 1 out of 3 federal employees will be eligible for retirement by 2020.
While I know that the government offers a nice pension, I wonder how many of these people will actually retire from the government. In the DC area, there seems to be a wide gap between the number of people that are eligible to retire from government service and the number that actually retire from the government.
People may decide to continue working because it gives them purpose, because they enjoy the socialization of work, or because they don’t have enough for retirement. Either way, the number of retirees always seems to lag behind the expected amount.
After talking to a lot of government folks, many of them feel completely unprepared for retirement. While a pension is nice to have, a lot of these people have not saved properly for retirement and need to continue working for the foreseeable future.
I had one person tell me that he would probably die at his desk because he had not saved up enough.
When I hear stories like that from older folks, it is a huge wake up call to ensure my finances are in order right now. I’d prefer to enjoy retirement and not die at work.
One of the goals that I set for the year is to save 70% of my take-home pay. Through September 15, I am slightly behind that goal, as we are saving 65%. But, I am hoping to improve this by the end of the year since many of our most expensive bills have already been paid for this year.
While I know most people don’t set goals like this, I wondered how much the average American saves.
Average American’s Savings
According to the latest data from July 2017, the St. Louis Federal Reserve reports that personal savings rate in the U.S. is a paltry 3.5%. This figure has been slowly trending down since December 2012, when the personal savings rate reached its high of 11.0%
3.5% is mind-boggling.
That figure includes the take-home savings, IRA contributions, and the employee and employer retirement contributions for their 401(k)s. This is downright disheartening.
Impact of Recessions
Highlighted in grey lines are times of economic recession in the U.S. As you can see in 2005, at the height of the housing market bubble, Americans were saving a paltry 1.9%, as we were feeling really confident about the economy.
However, when a recession hits, Americans typically start to trim the fat from their budget and increase their savings rates. Once they start to feel good about the economy, they start to loosen their belts once again.
Impact of Taxes
You may be wondering why the savings rate spiked in December 2012. This was due to the 2013 tax hike. Many companies paid out bonuses and dividends to their employees and shareholders to avoid the increase in taxes.
Savings: US versus Other Countries
If the U.S. is supposed to be the world leader when it comes to the economy, I wanted to know how the U.S. compares to other countries in terms of savings.
Can you say, “Not good”?
We weren’t anywhere close to the top when it comes to savings. It’s never good when you have to count from the bottom, which the U.S. is 11th from. While the U.S. is not at the very bottom (congrats Greece), it’s not too far behind.
Why the Chinese Save So Much
What really struck me from this chart though is how much money the Chinese are saving, 47.1%. That is double what Chile saves at 21.4%. While I was aware that the Chinese were prolific savers, I had no idea that Chile was #2 on the list.
It turns out that every employee is required to contribute 11% of their salary into a retirement account by law. The employee chooses their risk tolerance, and then the account automatically begins to act as a target fund, as the amount of equity is reduced each year as the employee ages. By the time the employee reaches retirement age, their investment is automatically auctioned. At that point, the retiree receives a guaranteed annuity the rest of their life.
I found that really interesting to learn, and hopefully you did as well.
Now, my friends to the north: Canada, what are you all doing?
I thought the U.S. enjoyed consumption, but wow. 2.5% is a full point lower than the U.S. I never would have thought that Canadians would buy more stuff than the the U.S. But clearly they do!
Based on the above charts, it appears that the U.S. is not the only country that is struggling when it comes to saving for retirement. While I would love to see the U.S. save 40% of their income like China, I’d be happy to see the average American save 10%.