Aim for a Higher-Than-Average Savings Rate Especially when Interest Rates Low
August 20, 2009
What's Your Savings Rate?
The Bureau of Economic Analysis recently announced that the U.S. personal savings rate climbed from roughly 4% to 5% during the second quarter of 2009. From a macro-economic standpoint, that's pretty good news--it's the highest level of savings this decade, and just what the economy needs long-term to shore up some shaky household balance sheets. Taking the micro-economic view, you should look at this savings rate in the context of your own situation. How does your savings rate stack up--and will this be good enough to meet your goals?
Bear in mind that the national savings rate is an average. It includes poor people who aren't in a position to save any money, and young workers who have not yet started to save. If you are making a comfortable living, you should be saving more than the average--and the longer you work, the higher your savings rate should be.
For example, consider a 22-year old starting out at a $30,000 annual income. Using some moderate assumptions for salary growth, interest rates, investment return, and inflation, at a 5% savings rate this 22-year old would have accumulated $1,460,869 at the age of 72. That doesn't sound bad, but adjusting that for inflation, it would be the equivalent of $333,234 in today's dollars. That's not a huge amount of money to stretch over what will probably be a 15- to 20-year remaining life span.
In other words, if you want an above-average retirement, shoot for an above-average savings rate. Especially with today's interest rates so low, plan on saving more to pick up the slack. Low interest rates also make it all the more important to shop around for the highest savings account interest rates. Even a modest adjustment in a savings account interest assumption can have a dramatic effect on your projected retirement savings.
Source:
Bureau of Economic Analysis • http://www.bea.gov/briefrm/saving.htm
