Savings and Retirement in the U.S.
The securities industry provides the products, services, and investment advice that help Americans meet their financial needs. Many citizens invest to provide themselves with the necessary funds upon their retirement. Some of the common securities that people invest in when planning their retirement are:
- Traditional IRAs
- Roth IRAs
Underpinning the investment swell are baby boomers who are scrambling to accumulate financial assets as they near retirement, Generation Xers (born between 1965 and 1976) who are beginning to invest much earlier than baby boomers, women who are gaining economic power, and growing numbers of minorities who are rapidly accumulating wealth.
A Closer Look at the Savings Rate
The profound growth in stock market investment in the past two decades has not translated into increased savings. In fact, the U.S. savings rate has plummeted steadily since 1984, when Americans saved 10.6 percent of their disposable incomes.
Why hasn’t the rise in earnings from investments translated into a higher savings rate? The answer lies partially in how “savings” are defined by the U.S. government. Returns on stock investments are considered “capital gains,” not savings. Since household spending increases when households reap large capital gains—but incomes stay the same—the result is more spending and less saving.
The present tax system discourages stock investments as a means of saving. With few exceptions, taxes are imposed twice—first, when income is earned, and second, when interest and dividends on the investment financed by savings are received. With that being said, many retirement planners look to investment in vehicles such as municipal bonds. Depending on their classification, some municipal bonds are tax-exempt.
Savings and the Financial Crisis
With the uncertainty and volatility of financial markets and the U.S. economy, individuals should keep their spending and savings rates in perspective. For example, the financial crisis of 2007-2009 spurred a 75% increase in the personal savings rate (see www.bea.gov). Yet volatility and high unemployment figures linger even today, with a sizeable 3.5% personal savings rate.
Continue reading about Industry Basics: Social Security’s Importance as Retirement Income.