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The Decline in the Personal Savings Rate - What Happened to the Discipline?

As more and more American baby boomers are nearing and entering their retirement years, many of them are concerned about whether their retirement savings will last them long enough to ensure their current quality of life, and rightly so.

During my work as an investment advisor and in my travels and contacts with people in all facets of life, I have seen first-hand how the lack of savings by Americans for their retirement can lead to disastrous effects, both on their financial situations, but on their emotional well-being as well. The data speaks for itself. According to the Organization for Economic Co-operation and Development (OECD), the net household savings rate as a percentage (%) of household disposable income for the US in 2008 was 1.6%. That is to say, that on average American households saved only 1.6% of their disposable income. As compared to other developed nations, the US has a very low savings rate. As a reference, the savings rate for some of these developed companies is as follows: Germany (11.6%), France (12.7%), Italy (9.2%), Switzerland (12.6%) and Japan (3.3%).

As Americans, why do we not save more of the money we work very hard to earn? I firmly believe this is a result of our lack of financial discipline. What I mean by lack of discipline is as it relates to making the right decisions as to our lifestyles, spending decisions and to a lesser extent our careers.

Here is an example: As an advisor, I frequently meet and consult with wealthy individuals and many, to my surprise, have earned their wealth on their own. It was not handed to them by their parents. After meeting and working with affluent people, I immediately began to notice similarities between many of them.

1. They were savers. They saved a much higher percentage of their disposable incomes as compared to the average American.

2. They live well below their means. I cannot stress this enough. The most common characteristic of these individuals was they were not concerned about "Keeping up with the Jones," but rather live a relatively conservative lifestyle, focused on achieving financial independence.

Naysayers will argue that while these are valid points, these individuals were lucky enough to have good high-paying jobs. I would agree that a stable high-paying career is definitely a significant component in helping achieve financial independence, but do not believe that this factor, and this factor alone, helps individuals achieve this independence. There are many many individuals with high paying jobs, many of them in stable positions, but living paycheck to paycheck. This lack of discipline on the part of these individuals can at a minimum leave ill-prepared for their retirement, or worse in the long run, possible financial ruin.

As I write this article, I am reminded of something that my father used to say all the time (and still does, although to a lesser extent) - "It doesn't matter how much you make, but how much you save." As a young guy, when I was working in investment banking, this advice went "in one ear and out the other." But as a guy in my 30s I really appreciate this line of thinking and how it can really affect Americans for the better.

Consider this: the effects of saving $500 per month and investing those monies have a very large potential for growth in the long run. Assuming an 8% average return on investment, by saving $500 per month, in 5 years it grows to $40,000, 10 years - approximately $100,000, 20 years - nearly $302,000 and in 30 years - approximately $740,000. The effects of compounding still astonish me to this day. If a 30 year old individual starts saving $500 per month today and does so for 30 years, and retiring around the age of 60, he could have a very nice nest egg in addition to his social security income (if it is still around in 30 years), his pension plan (from his employment, and or 401k, if applicable).

Now for some more recent data (which is not very meaningful, in my opinion). The US Bureau of Economic Analysis recently reported that the US savings rate as a % of disposable income has been increasing over the last few quarters. In fact, from the first quarter of 2008, the savings rate has been increasing to approximately 4.5% as of the third quarter 2009. While, in my opinion, this is good, I believe this will not last. Data has shown that during periods of economic downturns, we see savings rates increase dramatically, only to see them fall once the economy begins to come back. If we continue saving just a little more than we have been saving on average, it could make a meaningful difference in the long-term financial health of many.

I am a firm believer in saving, especially as it pertains to retirement and allowing the possibility to enjoy retirement years in relative comfort. The purpose of this piece was not to criticize us as Americans on our lack of financial discipline as it pertains to saving, but to show us that many of the financial difficulties people face in their retirement years can be avoided with some careful long-term planning.

Tome Tomaj is an investment advisor representative and a financial markets investor. He is the founder of White River Capital Management LLC, an independent registered investment advisor. White River specializes in the management of separately managed investment accounts for individuals and institutions. To find out more about his investment philosophy and sign-up for his FREE market commentaries and articles, please visit: www.wr-cap.com/signup.html

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