Headlines blared the latest news from the Commerce Department on Monday afternoon, which pointed to seemingly contradictory data that 401k assets hit all-time highs right before savings rates hit 10-year lows.
What gives? The confusion is understandable, and stems from asset appreciation due to a soaring stock market, and not necessarily from better savings behavior on the part of participants.
It, of course, reinforces the view that current economic conditions are great for workers with access to employer-sponsored retirement plans. Those that don’t risk falling further into the yawning retirement coverage gap.
Yet buried in a Reuters report was an interesting blurb involving the recent tax reform controversy.
“The impact of low savings on consumer spending could, however, be temporarily offset by income tax cuts which went into effect in January,” the wire service noted.
More money in worker paychecks translates to, yes, more spending, but also the potential for more saving (at least in theory), so if true, notch another win for the bill, tagged as “Armageddon” before its passage by opposition leaders.
However, in an alarming aside, Reuters added that consumers aren’t only spending as fast as they are earning, but also withdrawing from savings already set aside.
“Rising household wealth due to record gains on the U.S. stock market as well as higher home prices likely made Americans more confident to dip into their savings to fund purchases, economists said.” [Emphasis ours]
Confused? Join the club and imagine how participants feel.
A savings rate this low hasn’t been seen since December 2007, when the economy slipped into recession before it bounced back to 6.6 percent by mid-year 2009.
Overall, savings fell to $351.6 billion in December from $365.1 billion in the prior month. Savings declined to $485.8 billion in 2017, the lowest level since 2007, from $680.6 billion in 2016, according to the wire service.
The saving rate dropped to 2.4 percent from 2.5 percent in November. It decreased to 3.4 percent in 2017, a 10-year low, from 4.9 percent in 2016.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
