Study: Low-income households need to save 21% now to support retirement

Savings among households has pretty much become a national pastime that has gone the way of horse and buggy rides, home-to-home ice delivery and eight-year-old chimney sweeps. Whether it’s because of stagnant wage growth, too much debt, a lack of willpower or a paucity of incentives, the Western world doesn’t save anymore.

When individuals and households don’t save now they sacrifice their future retirement, especially at a time when people are living longer. Financial experts are also citing concerns that retirees might even outlive their retirement savings.

In order to circumvent this problem and prevent it from metastasizing, a new study recommends that financial institutions or policymakers begin to offer greater incentives so Americans are enticed to save more and rely less on foreign investors.

According to an Oxford Economics study presented at a conference in Washington this week, authors say businesses should encourage savings through payroll deductions, while other companies should automatically enroll employees into savings plans.

“To create the strong investment (and) labor recovery that we want to see in the U.S., that’s going to need to be matched by savings by U.S. households if it’s going to be truly sustainable and retirees are not in part increasing dependence on government for their well-being,” averred Oxford Economics CEO Adrian Cooper. “Sadly, that’s not the direction we’re heading in right now.

If action is not taken then the current savings situation will worsen. For instance, if the savings rate does not increase to between five and nine percent of the GDP then the United States would be prompted to persist depending on borrowing from foreign investors to maintain national investments between 20 and 25 percent of GDP.

In addition, a low-income household right now needs to put away 21 percent of their income in order to fund an “adequate” standard of living in their winter years. If not then they risk working longer, diminishing their standard of living and/or running out of money in a short period in retirement.

The personal savings rate in the U.S. hasn’t gone beyond 10 percent since the middle of the Reagan administration in 1984. The closest the national savings rate ever came to hitting the double-digit mark was in 2008 when it surpassed eight percent. Since 1959, the highest it’s ever been was 14.6 percent.

We reported Tuesday on a Bankrate.com survey that found more than one-quarter of Americans have zero emergency savings, while a majority has far less than the recommended six months worth of savings in case of an unforeseen event.

“Americans continue to show a stunning lack of process in accumulating sufficient emergency savings. Even among the highest-income households—those with annual income of $75,000 or above—fewer than half [46 percent] currently have a six-month savings cushion,” said Greg McBride, Bankrate.com’s chief financial analyst, in a statement. “Many of those under age 30 have the benefit of lower expenses due to roommates, living with their parents or being students. Ages 30 through 49 are high-spending years when expenses often rise faster than emergency savings can keep up.”

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