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Recently, the Commerce Department reported that the 2006 personal savings rate for Americans was –1%. (1) This report was met by media doomsayers who warned that the savings rate has been negative for an entire year only four times in history: 1932, 1933, 2005, and 2006. (2)
The personal savings rate is calculated by taking disposable personal income (income after taxes are taken out) and subtracting the amount of outlays or spending. This simple calculation would seem to reveal that people spent more than they made in 2006. However, it is important to consider what this formula does not account for. Save Up and Be Counted Because the personal savings rate uses after–tax money in the calculation, it doesn’t account for contributions to employer–sponsored retirement plans, such as the 401(k), which are funded with pre–tax contributions. Last year, you could have invested a maximum of $15,000 ($20,000 for people aged 50 and older). In fact, by the end of 2005, 401(k) and similar savings plans had assets totaling around $3.2 trillion. (3) Also not included in the personal savings rate are other important gauges of personal savings, such as capital gains on stocks and real estate, equity in private businesses, and the gains from mortgage refinancing. These sums are often invested. In fact, the personal savings rate considers mortgage payments as an outlay, ignoring the importance of the value of your home. In the end, despite how useful figures like the personal savings rate may or may not be, your own retirement hinges on your savings and investments. It is important for you to determine how much you need to fund the retirement lifestyle you desire and to set your savings goals accordingly. It’s easy to be an alarmist about the nation’s personal savings rate, but much better to take a disciplined approach to your own retirement savings. To discuss your personal savings progress, please call today. 1–2) Associated Press, February 1, 2007
The Savings Scare That Wasn’t
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