Saving in a low-yield world
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Personal savings rate could soar

Apparently, all that Americans needed to spur them to save money was a meltdown in the financial industry. Earlier this year, the personal savings rate giddyapped this year above 4 percent for the first time this decade, according to the Bureau of Economic Analysis. After a few years where our savings barely nudged above the 1 percent mark, we're now setting aside a more respectable amount of our disposable personal income.

Some economists say the rate will continue to climb over the next three to five years as consumers who have been affected to varying degrees by the financial crisis alter their spending and savings patterns.

A bitter lesson

Former Federal Reserve Board governor Lyle Gramley, now senior economic adviser with Soleil Securities Corp., says he wouldn't be surprised to see the savings rate reach 8 percent.

"Consumers have learned a bitter lesson that their past behavior takes them way out on a limb that might get sawed off. They can't count on the increase in the value of their home or their 401(k) to do all the saving they need to fund their retirement years or to educate their children or for medical contingencies. They're going to have to do some of the savings themselves, so I think that will motivate a gradual rise in the savings rate," says Gramley.

Keith Hazelton, senior vice president and director of economic research at the Oklahoma Bankers Association, goes considerably beyond that and says the fear factor among baby boomers could push the savings rate to 12 percent within the next five years.

"I think baby boomers will pay down debt with a vengeance. They have stepped to the brink of an abyss and seen a more grim future in the absence of paying down debt and increasing savings. If anything, this last year and a half, this recession, as severe as it's been, has been instructive for this group that has dominated the country's economy for 50 years."

Unfortunately, a lot of people continue digging deeper holes for their finances. They fear an underfunded retirement but have expenses that need to be dealt with today, and without a properly funded emergency fund they're making moves they may regret in the years ahead.

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"All of a sudden they need extra money because their well doesn't work and they're pulling money out of IRA accounts," says Mark Carruthers, a Certified Financial Planner in Garnerville, N.Y. "They're taking a hit and paying the penalty. It shocks me. Most people live paycheck to paycheck. They were getting by during good times but now overtime isn't readily available and their investments have decreased. As Warren Buffet says: You can't tell who's swimming naked until the tide goes out."

Low-yielding safety

The fear factor could lead people to much safer investments as they repair their portfolios. Hazelton says he expects baby boomers to start allocating more savings resources to those types of instruments that can't be easily affected by market or economic fluctuations -- in other words: CDs, money market accounts and money market funds.

It's understandable that consumers would seek safety for a greater portion of their portfolios after getting a collective whack upside the head in the stock market. But with inflation possibly remaining low for the next couple years, and even beyond that, being too heavily invested in low-yielding investments could do more harm than good to a portfolio.

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