What would happen if every single American saved $1 million

Great Debates
41

I understand we are tying to get to the $1M mark, but . . .

Sometimes it’s the journey not the end state.

Just making the attempt to get there will yield bit dividends (no pun intended). Talking to some 20 somethings in my office about saving while they also say there’s no way to do it with loans and high rent while holding their Starbucks caramel macchiato is humorous. Another stated that her phone cost $1,000 because she had to have 128GB. People confuse want with need all the time.

I’m a big saver so I default to that I suppose. By far the best tool in my youth was to spend a couple of months writing down every penny I spent. Every candy bar or can of coke. Knowing where you’re pissing away your money goes a long way to finding the $100.

42

Until I was 35, I never made more than $12,000 a year. I sometimes had an extra $10 a week. I never had an extra $100.

43

Over the last 43 years, inflation has reduced the value of the UK pound by a factor of about 11.
So your future $1,000,000 would be worth roughly $90,000.

44

Right, the point is that you can’t just take the naive rate of return, which was supposed to be a generous 6%. You have to take your rate of return and subtract the inflation rate to get your real rate of return. And then your return doesn’t look quite so amazing.

Still, saving a small amount of money every paycheck for decades is going to add up, and if you actually want to have a retirement that’s the only way to do it, unless you’ve got a wealthy uncle in poor health.

45

And how many people these days have decades of uninterrupted employment?

46

Well, if you’re expecting long periods of intermittent unemployment, you better stop saving small amounts and start saving large amounts, because you’ll need that money for the months you’re not bringing in a paycheck.

So you’re saving both for retirement and for a rainy day, and how much you need for both depends on how likely that rainy day is, and how much you’re going to need for retirement.

And if you’re on the ragged edge right now such that saving anything, even a little bit, is impossible, then you’re either going to have to change your situation somehow or get used to the idea that a rainy day is going to bankrupt you, and that you’re going to be relying on social security for your retirement.

47

This. All of this.

If really in such a fix that it’s hard to find money to save, it more imperative than ever to find something to save.

You can always find an excuse to not to do what you should be doing.

48

I think this is the more interesting question than the other thread since the savings will have to be made over time. The biggest change is that the US will not be the giant market for consumer/retail goods and services it once was since everyone will focus on savings, and buying needs vs wants.

The US economy will turn of one into a net lender rather than net consumer, but this assumes that the vacuum will be filled as the US turns away from spending. Also, we have to determine if the government will also be saving rather than spending. The US is number 2 in terms of per capita spending (UAE and all their oil and luxury leisure activities are #1). Hong Kong is number 3, the rest in order are: Swiss, Lux, Bermuda, Norway, Macau, Germany, Canada, Austria, Australia. Then you have to look at percent of world market (this is all off the top of my head from my barely used econ degree): the US is 27% of the world’s market (non-exceptional, ha!) which represents $11.5 Trillion in household final consumption expenditure dollars. To equal this offset, you have to look at the next 6 countries: China is 2nd at 7.72% (3.32 T in HFCE), Japan, German, UK, France, and Brazil (3.26%, 1.40 T HFCE).

Looking at the list of per capita spending and spending by market and corresponding HFCE, there is little congruity, with only the US and Germany being on both (Canada and Australia make the top 15 in the second list). The reason for comparison is to see if there are any indicative habits between the populaces. A lot more number crunching and assumptive ratios will have to be scrutinized to provide more than a back of the envelope analysis. For instance, UAE which is number 1 in per capita spending is #33 as percent of the global market, meaning for a people that spend a bunch, it’s not a large part of the overall market so their consumer decisions would have less impact.

My hypothesis is that with such a large drop in global demand, prices will have to drop immensely, but over time. There may be some shocks as people/investors get ahead of the curve, but nothing as if this were to happen all of a sudden. Any industry with a high labor component, with commodity inputs, and commodity like substitutes, is going to send production to lower labor cost production geographies (assuming free markets).

I would also predict interest rates to drop since a large amount of people are now turning away from spending to saving cash. Banks will have to drop interest rates to loan out their increasing cash deposits. Wealthier investors will probably invest heavily in equity positions, possibly more capital available in terms of angel investments, and startups, my bet will investment dollars will seek cash rich investments.

I don’t predict good times for low margin business. The mega corps will still exist, just at lower profit levels. Smaller business and industries will shrink or go out of existence (why work when you can save?)

Lastly, I think there will be less innovation. Without the demand, innovation will start to be phased out for higher profits. There will be less need to distinguish oneself from competitors, again, assuming savings mentality is paramount. For example, flip phones may still be in vogue, how many 9 - 17 year olds really need the internet mobile with them? That being said, anything that makes the home more efficient/entertaining will probably be good business.

49

I believe what will happen is interest rates will turn negative to encourage spending

50

That was my point. Given the state of typical employment and company “loyalty” these days, I honestly think it’s wise for everyone to expect this.

51

I agree but they would be no better off at the end.

I think it would be much like the situation in this article The Retirement Calculator From Hell. IIRC there are six of these articles, and I’m referencing the fourth one.

The author imagines a situation where everyone starts saving prodigiously, which is currently touted as the solution. He uses an imaginary closed system to simulate ours (people on an island using coconuts as money and saving them for retirement) and takes it to a frightening conclusion as they retire, showing how demographics override everything, even if all have saved an appropriate number of coconuts. I include the final paragraphs, as he applies it to our current situation:

*The solution, then, is for folks to retire later. We’ve already started down that road by raising the retirement age for future retirees to sixty-seven. Unfortunately, we have a ways to go. In order to keep the current worker-to-retiree ratio at 3:1, Arnott and Casscells estimate that the retirement age will gradually have to be raised to seventy-three. Of course, the government need take no action; politically, it will prove far simpler to let poor asset-class returns and low savings force older Americans to postpone their retirements. In the past few years, millions rudely awakened to the fact that they weren’t going to retire at forty. Over the next few decades, most of the remainder will discover they won’t be doing so at sixty-five, either.

That’s the bad news. The good news is that this analysis pertains only to society at large; if you’re reading this article, you are likely saving more than average. To the extent that you do, you’ll be able to retire that much earlier than seventy-three. The really good news is that your cohorts are saving so pitifully little that this will be relatively easy to do.

The above applies only to the Boomers. The X-ers, and those coming after, will have a much harder time of it. If you are currently under forty, you will shortly be traumatized by the sight of large numbers of your parents’ generation subsisting on cat food, and your generation will begin to save prodigiously. In such an environment, it will be very difficult to gain a comparative advantage over your peers.

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.*
That’s the scary part, to me. If everyone saved diligently, his model says we’d be no better off. In the current retirement fiasco, demographics will override everything no matter what we do. I recommend reading the entire series, but you should probably curl into the fetal position before starting.

52

It’s counter-intuitive. I can see the impact on the front end (obviously if people are saving they aren’t spending money on goods and services now…or, I suppose, spending as much money as they were), but I don’t see how he’s saying on the back end we’d all be the same. People are going to retire at different times, and, basically, when they start retiring then consumer spending is going to go up as retirees start spending their savings. Unless he’s thinking this will be some sort of situation where lots of retirement money is chasing few goods, I’m not seeing how the prediction makes sense, but then I’m not an economics person so maybe I’m missing something.

53

If you’ve saved money for retirement, you use that money to buy stuff. And the stuff you buy is goods and services produced by current workers. And those workers only produce so much stuff. So yes, it’s exactly that if we all saved a million dollars and then tried to spend that money decades later we’ve now got a bunch of “new” dollars chasing the current production of goods.

Presumably that increased demand for goods would mean we could increase production. But money taken out of circulation for savings today means a lower money supply today, when that money gets put back into circulation that means more money and therefore inflation, and that means your saved money buys less, just when you need it.

Production and consumption have to match, you can’t consume what hasn’t been produced. Durable or capital goods can be produced today and consumed tomorrow, but lots of goods and services can’t. Or to put it another way, if you have seven fat years and then seven lean years, you need to save the grain in the fat years to consume in the lean years. You can’t sell the grain and save the money and then expect to buy grain in the lean years, because there won’t be enough grain to buy, and even if there is you’re going to have to pay a much higher price.

54

True.

Part of this is caused by the effects of inflation. But another important factor is the prevailing interest rates on safe investments like Treasuries and CD’s.

Let’s say that one million dollars today is worth what half a million was worth 30 years ago. 10-year Treasuries were paying around 9% then, so in 1987 you could get around $45,000 a year. Today, you could get around 2% of that million, or $20,000. Which is much less income today than $45,000 was in 1987.

Without knowing what interest rates will be like in 30-40 years, it’s hard to predict how much that million in 2047 dollars would bring. If interest rates go up, that might mitigate some of the effects of inflation.

55

I don’t see that so much a ‘problem’ as part of putting the hypothesis in perspective. Although, assuming $100/week is intended to mimic the IRA contribution limit, that will rise with inflation, and wages have, historically at least, increased slightly faster than inflation. However, any nominal end amount 43 yrs hence for 22 yr old is obviously not to be treated as if today’s purchasing power.

The even bigger part of putting it in perspective is considering how much is invested in the US now. Private gross domestic investment was recently around 16% of GDP, the US current account deficit was around 2.6% of GDP. That means domestic savings is around 16%-2.6% of GDP of ~$18tril so around $7.5k/yr for each of ~320mil people in the US. IOW if all private domestic savings* were replaced by a flat $5.2k/head that would be a decrease, though not a huge one as that number bounces around quite a bit.

An additional $5.2k/person of savings would be a fairly large increase, but not as dramatic as some people seem to imagine based I guess on thinking of how huge an increase it would be for lower income, and a lot of pretty middle income actually, Americans who save little or nothing now. But the idea it would be an earth shattering economic change comes from not putting it in perspective. Especially not if that increase happened only in the US and no other country, nor is it ever remotely realistic to assume such changes would be instantaneous.

*which includes the savings of companies and savings/investment in residences. But consider the first of those v somebody buying a mutual fund. a) a company funds a new factory out of free cashflow, or b) it pays the free cashflow out to investors as dividends but issues new stock to fund the factory, which stock is purchased by a mutual fund in turn funded by weekly $100 IRA contributions: big picture economically, same thing.