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Save loads of money now to avoid regrets later

Are you saving enough?
Studies indicate you’re probably not–or at least not as much as you used to. In fact, one of the most disturbing trends that economists have tracked over the past 25 years has been the steady decline in the U.S. savings rate. The savings of Americans have fallen from 7.7 percent of disposable income in the 1970s to 6.5 percent in the 1980s to only 4.5 percent in the 1990s. Moreover, this rate is the lowest among the major industrialized nations.
The reasons for this trend continue to baffle researchers, particularly during a period when the U.S. government has offered many tax incentives for long-term savers, including individual retirement accounts and 401(K) retirement plans for employees; Keogh plans for small-business owners; and simplified employee pension plans for self- employed individuals.
One reason, however, may be the advent of government programs such as Social Security, Medicare and low-cost college loans. Another is that credit is far easier to come by these days, lulling people to accumulate considerable debt at the expense of saving for a rainy day. Unsolicited credit cards, home mortgages with less than a 5 percent down payment and deferred payment plans on major purchases all are forms of easy credit that years ago would have required individuals to have sizable long-term savings.
Even IRA contributions are declining
IRAs were first offered in 1974 as a means for individuals who weren’t covered by company pension plans to save for retirement. The plans enabled savers to shelter investment income and gains from taxes until they withdrew the funds beginning at age 59/ . In 1981, Congress expanded the use of IRAs by enabling all Americans to establish them. In addition, savers could deduct from their taxes the $2,000 they contributed to their IRAs each year.
From 1982-86, IRA contributions grew dramatically. However, with the passage of the Tax Reform Act of 1986, contributions fell rapidly. Although the law left intact the tax deferral of investment income and gains in an IRA, it ended the tax deductibility of contributions for Americans who earned more than $40,000 annually. In 1990, contributions to IRAs totaled less than $10 billion, only 26 percent of what they were in 1986.
Consequences for retirement
The decline in savings may mean that many Americans will be unable to maintain a satisfactory retirement lifestyle. They may be forced to put off retirement for years, working longer than they had expected, or U.S. taxpayers may need to subsidize them.
The findings of national opinion surveys imply that Americans grudgingly accept the implication that they won’t have enough money in retirement. Seventy-two percent of Americans believe they are saving less than they need or want to, according to a poll commissioned by the Competitiveness Policy Council and the Congressional Economic Leadership Institute. Many households sense they should be saving more but find that saving is a luxury they cannot afford.
Looking ahead
Researchers as well as the public recognize that many government programs won’t be as generous in the future as they are today. A survey released by the Employee Benefit Research Institute revealed that 82 percent of Americans are losing faith that Social Security benefits will be available when they retire. Their fears, in fact, appear to be well-founded.
The Congressional Bipartisan Commission on Entitlement and Tax Reform estimates that Social Security outlays will exceed revenue in 2013. If current inflows and outflows continue as anticipated, the commission says, the fund will be technically broke by 2029.
Your best defense against cutbacks in Social Security, Medicare and other government programs is to begin saving and investing properly–today. Of course, you’ll need to discipline your spending, but the payoff you’ll receive in the future–a financially secure retirement–will be well worth it.
(Lawrence Schulman, a Certified Financial Planner with Smith Barney Inc., has worked in the securities field for more than 30 years.)

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