A Crisis in the Making

A survey by the Federal Reserve shows that Americans are not saving enough for a comfortable retirement

When the Federal Reserve recently released its consumer finance survey, it showed some interesting trends in why Americans save - and how.

Take, for example, the statistics regarding direct ownership of individual equities. Between 2001, when the last survey was taken, and 2004, direct ownership of equities has increased among households headed by members of the baby boom generation, defined as those born between 1946 and 1964.

Meanwhile, ownership of "pooled investment funds," a category in which the Fed includes mutual funds, hedge funds, and real estate investment trusts, is lower than direct stock ownership for all age categories. Ownership of both stocks and funds dwarfs bond ownership.

The numbers belie the notion that individuals are fleeing stocks for funds or other instruments. Indeed, in all age categories, the percentage of families owning pooled investment funds actually declined slightly over the three-year period.

Nevertheless, Americans simply aren't saving enough. In fact, the savings rate was negative in 2005 for the first time since 1933.

"The data show that Americans are ill-prepared for retirement, and gained virtually no ground over these three years," says David Wyss, chief economist for Standard & Poor's. "The low saving rate and weaker returns in the stock market held back wealth, despite strong gains in housing. With the baby boomers rapidly approaching retirement, we need to start saving fast, and are showing no signs of doing so."

We advocate participation in any employee retirement plan for which you are eligible. We also advise the use of individual retirement accounts and Roth IRAs, if you qualify. Our recommended asset allocation remains 45% U.S. stocks, 20% foreign stocks, 20% bonds, and 15% cash.

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