Americans Save More When Fearful
Savings rates ebb and flow over time. We know this because the government is tracking this phenomenon…
The FRED (Federal Reserve Economic Data) graph/chart below shows U.S. personal savings rate trends from 1960 to 2020. What becomes apparent after a little analysis is the clear correlation between financial crises and savings rates. Financial crises nearly always strike fear in the hearts of Americans – this causes them to hunker down, hoard cash and think about their financial futures.
In the 1960’s (prior to 401(k) accounts and IRA’s), Americans were saving at a healthy 10% clip. The primary sources of retirement income at the time were pensions (certainly not available from all companies) and a small level of social security. Savings were the additional buffer. Bank accounts were common savings vehicles – interest rates were a little higher back then – around 4%(1). The personal savings chart below shows that savings rates have largely trended down since the 1960’s; however, savings spikes have occurred over time. Why is this?
You may note on the graph that savings rates spiked in the financial crisis period of the mid 1970’s. The early 1970’s was a period when unemployment shot up into the teens due to the Arab oil embargo which also coincided with severe bear market stock declines of over 40%. (2)
There were other spikes in the savings rate in the chart’s sixty-year history, but two that are notable happened more recently.
More Recent Scariness
The first more recent savings spike occurred in 2012 in the aftermath of the Great Recession period. The U.S. savings rate briefly shot back up to 12% that year. At the time, Americans were battle-scarred from very large unemployment rates that peaked in 2010-2011 and the residual effects of that financially challenging era.
Very recently, a huge second savings spike occurred during the 2020 COVID scare. This period included extraordinary increases in unemployment and unprecedented economic shutdown. The resulting fear of government-mandated business closures caused the personal savings rates to skyrocket to 13-14% in April/May 2020, but then even higher to over 30% for a few short weeks.
It Goes the Other Way Too – A Low Ebb in Savings
Referring to the savings chart once again, we see where financial comfort is clearly related to diminished savings rates. In the mid-2000’s, after many years of bull market and an extended period of low unemployment, the savings rate plummeted to a sixty year low of 2.2%. Additionally, it did not help that there was also rampant speculation in real estate at the time. Savings was diverted into overpriced residential real estate in the mid-2000’s – perhaps another sign of overconfidence and insufficient fear.
What Does This All Mean?
It could be that too much financial comfort is detrimental to our financial welfare. Psychological financial comfort appears to lessen the desire to think about the future. The downside to roaring markets and solid employment prospects is that financial comfort makes savings a secondary thought which may threaten preparedness for financially challenging periods and retirement.
What to Do?
It may pay to be a little fearful. Planning for the future requires some thought of provision for that future. The autumn squirrel gathering nuts is fearful, subliminally driven by instinct, about freezing to death mid-winter. Tapping into some discomfort (even during times of prosperity) may help spur us on to prepare securely and sufficiently for the future.
Grant S. Donaldson, MS, CPA
Tudor Financial, Inc.