Americans have never had much love for fiscal puritanism. We're a nation of risk takers and consumers. We want it all. We want to hit it big. We don't want to sacrifice the pleasures of today by saving for tomorrow.
Yes, I know the economy stinks, and saving isn't easy. Wages have stalled. The unemployment rate is still above 8%. Home prices are off. Stocks have recovered from the recession, but they have merely returned to highs reached years ago. Saving can also seem pointless when returns -- from investments, savings accounts or whatever -- are low. A lack of disposable income makes it even harder.
But the truth is, even in good times, we didn't save. In the 1970s, when the economy's debt-driven growth, high inflation, favorable demographics and steady increase in asset prices meant it wasn't so hard, we didn't save. We consumed.
From 1976, when the oldest baby boomers were hitting their 30s, through the peak in 2007, household net worth grew from $5 trillion to $67 trillion -- mainly because of the rise in home prices. Accounting for inflation, the rise was around $24 trillion in 2012 dollars.
Yet starting that same year, the savings rate fell from around 10% to a low of 1% in early 2005. And household debt rose from 70% of disposable income to a peak of 134% in 2007. Not only were people not saving, they were borrowing against their new wealth to spend even more.
Anthony Mirhaydari
Now, despite an epic housing bubble, retirement portfolios constrained by the fact the Standard & Poor's 500 Index ($INX) is at levels first reached in 1999, and household net worth below its pre-recession peak at $63 trillion, the savings rate has increased to 3.7%. This is an improvement, but it's far from enough. And we've only started to work down our debt, which has fallen to 113% of disposable income, thanks mainly to mortgage defaults. (Because of falling home prices, debt as a percentage of assets has actually increased.)
Moreover, people who are saving are taking fewer risks, selling stocks and piling into bonds and other fixed-income investments, lowering their potential returns in an environment of ultralow interest rates from the Federal Reserve.
The truth is that for most Americans, saving is dead. People are simply not putting away enough to fund a comfortable retirement, rebuild balance sheets damaged by the housing bust or benefit from the Fed's stated goal of boosting the prices of stocks and housing. And they're not taking enough risks with the money they do save to earn decent returns.
Straightening this out isn't easy, but I'll outline the way to do it below. And it has to be done, unless your retirement strategy involves freeloading off your kids, who'll have problems -- like massive student loan debts -- of their own.
Why saving seems so hard
Why does saving seem like an outdated concept?
Well, part of the reason is that Americans don't like to lower their standard of living unless they absolutely have to. Thus, while wages and some assets have bounced back (to a degree) from the recession, the added capital is going into things like the surge in auto sales or smartphones instead of building -- or rebuilding -- wealth.
That leads Morgan Stanley analysts to believe that Americans aren't saving more simply because they don't feel they can, given budget constraints.
Saving is a also a lower priority here than in places like Germany or even China. It's a cultural thing, too.
And Americans are protecting what money they have saved out of fear of recent market volatility, which explains the shift into "safe" assets like bonds.
What Americans have
Let's take a look at where things stand for the average American.
Because the country's wealth and income are concentrated at the top, economywide measures of income and net worth are somewhat misleading. The Fed's 2010 Survey of Consumer Finances, the latest available, gives us a clearer picture. It suggests that even middle-class, well-educated families are under strain:
- Median family income is down 7.7% since 2007 and stands at $45,800. For families whose primary earner has a college degree, it's down nearly 10% (but down only 1% for those whose primary earner lacks a high school diploma).
- Median net worth is down nearly 40%, from $126,400 to just $77,300 -- returning to levels last seen in the early 1990s. For those with a college degree, median net worth fell 34.6% to $195,200.
- The percentage of families that saved fell to 52% from 56.4% in 2007. Compare that percentage to the 62% of families with a college degree. Back in 2001, nearly 60% of all families saved.
While the wealthiest among us are enjoying a rebound, thanks to a resurgent stock market, the wealth of middle-class families depends much more on home prices. While the Dow Jones Industrial Average ($INDU) has been pushing to new post-recession highs, home prices are just now starting to get up off the mat.
Too conservative with savings
This dynamic has been made worse by the steady exodus of regular investors from stocks into bonds over the past year. Credit Suisse economists believe this dynamic is driven by the desire for higher returns (to outgrow inflation in an environment of ultralow interest rates) being beaten out by the desire for safety (given psychological scars from two asset price bubbles and busts in the past 12 years).
In August alone, bond funds gained nearly $32 billion -- the strongest monthly inflow since March 2010 -- while equity funds lost more than $19 billion. This continues a shift out of stocks and into bonds that's been in play since the financial crisis.
Over the past three years, Credit Suisse's Neal Soss believes the behavior of the average investor "suggests a preference for either insured bank deposits, for households seeking maximum security, or bond funds, for those looking to do better than near-zero returns." This preference, in the face of record corporate profits and a 10% year-to-date rise in the Dow, could be a huge mistake. Those investments historically return much less than stocks and, in the case of bank deposits, pay basically nothing these days.
In his words, "American households have already been disappointed by the once-in-a-lifetime house price collapse and the volatile rise in equities since the glory days of the dot-coms. Are they now setting themselves up for an unsatisfying outcome in their rush to fixed income?"
This disappointment could result in the inability to retire comfortably. A combination of lower wealth, inadequate savings, less time to retirement (for aging boomers) and lower return on investments (due to shift to bonds) could be toxic. This dynamic needs to change.
Making the math work
Let's run the numbers, with the assumption that our example wants to retire with a nest egg worth seven times his or her income. And, using the Fed's data, let's use someone with about 20 years to retirement by focusing on families in which the head of the household is between 45 and 54 years old. The median family has a net worth of $117,900 and a pre-tax income of $61,000.
Looking at their wealth holistically (stocks, bonds, and real estate) and assuming different annual pay raises (despite the fact these people in 2010 were making less than in 1989, adjusted for inflation), here is what their savings rate would need to be under different return-on-investment scenarios:
Right now, someone saving 5% to 6% of income a year would need a return on investment of more than 5% annually for the next 20 years. Yet 10-year Treasurys are paying only 1.65%, and investment-grade corporate bonds are paying 3.5%. High-yield corporate bonds, which are more speculative, are paying 4.7%.
The math just doesn't work. People must either take more risks or take more out of their paychecks each month -- or face the consequences when they can't work anymore.
I think the preference should be a combination of higher savings (and yes, forgone consumption) and more portfolio risk by considering a shift back into equities. I'm not talking simple buy-and-hold investing, which hasn't worked since the late 1990s. And I'm not talking day-trading stocks or employing risky strategies using stock options.
In my columns, newsletter and now in my new money-management service, I've been espousing a different way. Making the market's undulations work in your favor by rotating in and out of industry groups and asset classes showing the most strength at any given time. Back in June, for example, it was all about biotech. More recently, precious metals and the related mining stocks got a huge lift.
Right now, unfortunately, nothing is really moving. So I'm recommending cash as we wait for a fresh buy signal.
But new strategies like these, and yes, some fiscal discipline and more savings, are needed to get the retirement math to work again. Until that happens, Americans who should be saving and investing are at risk of paying for their fiscal sins as they enter the twilight of life -- not a happy thought.
Meet Anthony Mirhaydari at the MoneyShow Las Vegas
MSN Money columnist Anthony Mirhaydari will be one of dozens of financial experts on hand at the MoneyShow Las Vegas, May 13-16, at Caesar's Palace in Las Vegas. And admission is free for MSN Money readers. Just click here to register, and click here to see what Mirhaydari plans to talk about.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
