With broad swaths of the U.S. economy locked down for more than a year, those with good-paying jobs have had fewer opportunities to spend. The result is the highest saving rate on record and an estimated $1.7 trillion stockpile of pandemic savings. It’s widely assumed — and even encouraged — that consumers will spend a good portion of that money in the coming months as the economy reopens, but they would do well to also save some of it for retirement.
Americans are about average when it comes to saving money. The household savings rate in the U.S. averaged roughly 6% from 1995 to 2018, according to Organization for Economic Cooperation and Development data, which ranks 12 out of 27 countries for which numbers are available for the full period. It used to be much higher. The saving rate averaged closer to 12% from 1959 to 1984, according to the Bureau of Economic Analysis. It then began to decline, dropping to a record low of 2% in 2005. It has risen gradually since the 2008 financial crisis and has climbed to record highs during the pandemic, averaging more than 18% since last April through January.
The surge in savings could brighten Americans’ grim retirement prospects. Most people don’t put enough money away for the future, even if they earn enough to save. According to the Federal Reserve’s latest Survey of Consumer Finances, households for ages 65 to 74 have an average of $426,000 in retirement savings, and the median is just $164,000.
That’s not enough. Consider that a household with two adults needs about $45,000 a year before taxes to pay for food, housing, health care and other necessities in the most affordable places, such as Memphis. A common rule of thumb in financial planning, although not without controversy, is that retirees can safely spend 4% of the value of their nest egg at retirement every year, adjusted for inflation. On that basis, two retirees in Memphis would need savings of roughly $1.1 million just to get by, never mind money for travel or entertainment.
Yes, it’s a lot of money, and most people near retirement won’t get there, unfortunately. But with some discipline and foresight, younger Americans who earn enough to save can almost certainly get there thanks to the magical combination of time and compound interest. A 30-year-old with $30,000, which is the average retirement savings for households younger than 35, would need to save and invest about $250 a week to hit the mark, assuming a retirement age of 65 and that the money grows at 4% a year after inflation. A 25-year-old with no savings would have to save even less, roughly $220 a week.
Admittedly, given the size of the shortfall in retirement savings, $1.7 trillion doesn’t move the needle much. For perspective, if each of the 160 million U.S. workers saved $250 a week this year, it would add up to more than $2 trillion. That’s just one year, and it probably undercounts the total retirement savings needed because older workers would have to save more.
But it’s a start, and the message is more important than the initial impact. Rather than encourage people to part with their pandemic savings, they should be urged to invest it in their future, or as much of it as possible and to continue to save in the years ahead.
What about the recovery, you might ask. It’ll be just fine. There’s little chance people will hang on to all or even most of their pandemic savings after being cooped up for more than a year. The economy also has plenty of fuel, thanks to Congress and the Fed’s combined $9 trillion stimulus and relief effort — so much, in fact, there’s widespread concern the economy will overheat and inflation will spike.
Longer term, the impact of a higher saving rate on the economy is endlessly debated and hard to predict. But it could help ease at least one potential long-term threat to the economy: The U.S.’s giant unfunded Social Security obligation, which now stands at $53 trillion. Suffice it to say, if people have too little saved for retirement, it’ll be that much harder to rein in Social Security.
"The game changed in 2020 and there’s a lot we have learned that can potentially skyrocket our success through 2021," writes Chip Munn.
Of course, workers must first make enough money to save. With a median personal income of about $36,000 in the U.S., most people struggle just to pay for necessities. Also, those who can save must invest their money, and more can be done to help them. Employer-sponsored retirement plans, such as 401(k)s, are still too expensive, and too few workers participate. More problematic is that millions of people, including a growing army of independent gig workers, don’t have access to one. A simple solution is to raise the contribution limits for individual retirement accounts to match those of 401(k)s and give everyone access to the same retirement plan available to members of Congress and employees of the federal government.
But the first step is to encourage people to save, and there’s no better place to start than the $1.7 trillion in pandemic savings.
