Below is a chart that shows the percentage that Americans have saved from their disposable income (i.e. after income tax) since 1970. It’s falling, and that’s a problem. The most recent value is 4.5%.
US Savings Rate
1970-2013
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This 4.5% rate much lower than the double digit savings rates of the 1970s. The savings rate typically spikes during recessions, when people save more due to the uncertainty recessions create, but the savings rate has been on a clear, long term downward trend.
Now, some analysis of what this savings rate means for retirement. First, some assumptions. An average American currently retires at 61, and let’s assumes Social Security is only able to pay out 77 cents on the dollar in 20 years. This number based on the Social Security Administrations own calculations. Let’s also assume that a retiree can live off 70% of their pre-retirement income, which is a common assumption. With a 4.5% savings rate starting from age 25, a retiree would outlive their savings at aged 70, which is a problem given current life expectancy means they would likely live into their 80s.
Now to have savings last into a retiree’s 80s would require at least a 10% savings rate, though a 12.5% savings rate, provides a much more comfortable cushion. Interestingly enough, these double digit savings rates are exactly where savings rates were in the 1970s.
It seems that in the 1970s Americans were saving sufficiently for retirement, but since then savings haven’t been sufficient for an adequate retirement in your early 60s based on life expectancy.
If the savings rate doesn’t return to double digits, then there are a few options:
- People may work longer, in keeping with their longer life expectancy.
- Working age children may do more to financially support their parents in retirement.
- Retirees may take a much lower standard of living in retirement, relative to when they were working.
- Social security reform may increase the savings rate or push back the retirement age.
For you, the simplest option is to increase your savings rate to 10% if you can afford it. Or, if it’s already there or higher, give yourself a pat on the back. Otherwise, it’s prudent to plan on working longer.
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