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What the zero rate of savings means

Posted: April 20, 2009 10:24 p.m.
Updated: April 21, 2009 4:55 a.m.
The personal saving rate in the U.S. has declined sharply in recent years.

In 2005, it was zero. It currently is about 2 percent. But for a brief stretch, it was in negative territory.

Why has our saving rate fallen, and what does its fall tell us?

Darrell Spence, a Capital Strategy Research economist, says, "Many things affect our saving habits, but one explanation for the recent downward saving trend was the multiyear run-up of home values and stock markets.

"As home equity and investment portfolios grew, people felt wealthier and de-emphasized saving outside of retirement or higher-education accounts."

According to data from the Federal Reserve and the U.S. Bureau of Economic Analysis, economic boom times, such as the late 1980s or the tech bubble that followed in the 1990s, resulted in rising net worth of Americans (sum total of investments, retirement savings and home equity minus liabilities).

When the economy and home values are declining, or when they stagnate, personal saving often increases, as it has in recent months.

What can we learn from this? Regardless of market or housing conditions, saving and investing for purposes of retirement or higher education are vital.

By following a consistent investment program appropriate to your stage of life and your financial objectives, you won't just be saving for a rainy day. You will be planning a balanced financial future for your and your family's objectives and retirement.

In the current economic woes, can your retirement nest egg use a boost? This may be a good year to increase your retirement plan contributions, thanks to the IRA's inflation adjustments for 2009. Key changes include:

n Contribution limits for employer-sponsored 401(k) and 403(b) plans climb from $15,500 to $16,500. Catch-up contributions for individuals age 50 or over rise to $5,500, a $500 increase over 2008.

n The minimum contribution threshold for SEP (Simplified Employee Pension) plans increases from $500 to $550.

n Contribution limits for SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) jump from $10,500 to $11,500.

n Contributions allowed for Roth IRAs will phase out for joint filers with incomes exceeding $166,000 (up from $159,000), and $105,000 (up from $101,000) for singles and heads of households. (Contributions are not allowed once income reaches $176,000 for joint filers and $120,000 for singles or heads of households.

n For those covered by a retirement plan at work, deductions for contributions to traditional IRAs begin to phase out at $89,000 (up from $85,000) for joint filers and $55,000 for singles or heads of households (up from $53,000).

No deductions are allowed once income reaches $109,000 for joint filers and $65,000 for singles or heads of households (up from $105,000 and $63,000, respectively).

Now more than ever, it is important to seek professional advice in retirement planning.

Jim Lentini is president of Lentini Insurance & Investments Inc. His column reflects his own views and not necessarily those of The Signal.


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