Our nation’s need to save

By Ken Frenke, CFP®

Many years ago, a newly retired couple came to me for investment advice. They had never earned more than $30,000 per year.

They had never invested in stocks, owned rental real estate, or received an inheritance. Yet, they had a nest egg of over $500,000!

When I asked them how they did it they replied, “We always lived on less than we earned.” As a young financial planner, I learned a lesson that I still treasure.

We all, as a nation, need to learn from that couple today. Where Americans once saved, on average, more than 8 percent of our after-tax income, that figure is now 1 percent. At all levels of society, we place little value on saving for the future.

According to the Employee Benefit Research Institute, 40 percent of people don’t save at all and 60 percent have no idea about how much they need to save.

As a result, America ’s three-tiered “savings infrastructure” is on unsteady ground.

The first tier is Social Security, upon which most Americans depend. It requires a major overhaul. Unless some form of privatization is successful, this will remain one of the least efficient means for people to save for their future. That’s because we will pay in more and more of our income and receive less and less benefit.

The second tier is comprised of company pension plans. Twenty years ago, 112,000 companies had defined-benefit pension plans that paid a monthly pension to retirees. As the cost of funding those plans rose, many companies switched to employee contribution plans, such as 401k's.

Today, just over 31,000 companies offer traditional pensions. Yet, four out of five of those plans are underfunded. They simply don’t have enough assets to pay promised benefits.

Even the Pension Benefit Guarantee Corp. (PBGC), the quasi-federal agency that insures pensions, faces an uncertain future.

So many companies have gone bankrupt in the past few years that in 2004, the PBGC reported a $23.3 billion deficit—double 2003’s shortfall of $11.2 billion.

Designed to bail out failed pension plans, the PBGC itself may need a bailout!

Employees underutilize the third tier of our savings infrastructure, 401k plans. According to the new book Coming Up Short: The Challenge of 401k Plans, one-quarter of all workers do not use them at all.

Just one in 10 contributes the maximum 401k allowance, 50 percent don’t contribute enough to get the full company match, and almost half cash out their plans when they transfer jobs.

Many take too much or too little risk and don’t rebalance their accounts to manage risk as their accounts grow.

In short, Americans are counting more and more on retirement income from decreasingly reliable sources.

We are not building the savings upon which our nation’s future economic growth and our personal financial stability depend.

What does the Bible have to say about saving? Plenty.

If you are giving generously, then the Bible gives at least four good reasons to save.

• Provide for future family needs.“Ants are creatures of little strength, yet they store up their food in the summer” (Proverbs 30:25, NIV).
• Avoid the use of debt.“Owe nothing to anyone except to love one another; for he who loves his neighbor has fulfilled the law” (Romans 13:8).
• Establish an inheritance.“A good man leaves an inheritance to his children’s children, and the wealth of the sinner is stored up for the righteous” (Proverbs 13:22 ).
• Meet the future needs of others.“A generous man will himself be blessed, for he shares his food with the poor” (Proverbs 22:9, NIV).

We may not have control over Social Security or our company’s pension plan, but we do have control over how much we save.

Saving helps us be prepared for emergencies, confidently plan for retirement, and buy cars or other large-ticket items without borrowing.

The key is to begin saving and not give up. It doesn’t matter how much you start with.

Make your “savings bill” a part of your budget, just like the rent or utilities.

If you do it regularly, you’ll quickly see how even small amounts add up. You’ll soon look for ways to cut spending, so that you can save even more.

Use the “two-week” rule. If you want something, wait two weeks to buy it. This will help you become an impulse saver instead of an impulse buyer!

You’ll also see that the more you save, the freer you are to give. John Wesley summed it up this way: “Earn all you can, save all you can, give all you can.”