The Savings Rate is Nonsense

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Today the AP is bemoaning that the savings rate in the USA hasn’t been this low since 1933. Another jab at Americans for being irresponsible. Yet the truth is Americans put more money in their retirement funds than EVERY OTHER country on the planet. When it comes to planning and preparing for retirement, we are the most responsible.

A negative savings rate means that Americans spent all their disposable income, the amount left over after paying taxes, and dipped into their past savings to finance their purchases.

The key part of the sentence above is after paying taxes. Pensions and 401Ks are funded pre-tax. Americans are smart enough to chase down 10% returns pre-tax in their 401K, instead of getting a post-tax 1-2% return in their savings account.

And isn’t it common sense that savings rates should be low when interest rates are low? Of course this possibility isn’t mentioned in the AP release. Another thing not mentioned when discussing the savings rate is that if something awful happens, we are allowed to borrowed against our 401K to help us through emergencies.

FWIW, my retirement fund is 16 times larger than my savings. This is not by accident.