Wednesday, July 12, 2006

America's savings hoax exposed.

"America's savings hoax exposed", is the title of Paul Farrell's warning to America's future retirees. In this MarketWatch piece, Farrell examines the slide in our national savings rate over the past few decades. What is behind this problematic trend and what does it mean for you, as a future/current retiree?

The crux of Farrell's argument is that America's savers and investors are kidding themselves when it comes to their retirement preparedness. They either have too little set aside to live comfortably or are fooling themselves into thinking that their investments will perform well enough to enhance their wealth.

Here Farrell makes the very important point about inflation's effect on savings and investments while quoting a Dalbar Research study on investor behavior:

These guys have surveyed actual performance of mutual fund investors for two decades: The average investor makes less than inflation, thanks to fees, expenses, trading costs and taxes, but doesn't know it or refuses to face the truth about how bad it is. Investors tend to focus on the deceptively optimistic "fund performance" statistics in the news.

The overarching theme in the article is that a policy of saving is discouraged by the status quo, which favors spending and consumption. The focus is on short term "growth", and I'd say that seems to be the preoccupation in this world of debt-based economies.

I wonder if anyone has any suggestions for getting around this savings problem? Warren Buffett always looked for investments that could return a certain percentage gain above the inflation rate. Some small (and big) savers and investors turn to precious metals for a good part of their savings as a means to prevent the wealth eroding effects of inflation. What can you do?