Is Your Lifestyle Sustainable?

Are you one of those people who got caught up in the spending frenzy of the last few years?  Did you buy big ticket items like an SUV, a boat, a cabin, a condo, or upgrade your home to one more luxurious with money you neither had nor could afford to spend?

If so, you could be among millions of Americans who are living well beyond their means and could be headed for serious financial trouble.

The conventional wisdom of financial advisors has always been that individuals should save at least 10% of their monthly income for future necessities like emergencies and retirement.  Yet, despite the much professed prosperity in America, Americans have one of the lowest saving rates in the industrialized world.  Since the early 1990s the savings rate in America has plummeted and in the new millenium has struggled to stay above one percent.  In 2005, the savings rate declined into negative territory (-0.5%) for the first time since the Great Depression years of 1932 and 1933.  Currently, Americans on average are struggling to save just one percent of their income.  Millions save nothing and spend more than they have coming in every month until disaster strikes.

Even during the last severe recession of the President Carter years of the early 1980s, Americans were saving 11-12 % of their income.

Since 401(k) retirement plans were established under the 1978 Tax Revenue Act Americans have been encouraged to take control of their own future retirement needs.  Company-sponsored retirement pension plans were to be phased out, although many larger companies and government agencies still provide them.  However, even for diligent savers, 2008 was a horrific year.  During the past 15 months the stock market implosion resulted in over $2 trillion in personal retirement plan assets to evaporate.  Defined benefit plans or pensions were in the red by an estimated $409 billion in unfunded contributions.

If you do nothing to adjust your asset allocation in your retirement plans in 2009, you could see another serious depletion in financial assets.  If you think the market will recover, just look at the recent 10-year history.  If you stayed pat with your growth strategy since 1999, by the end of 2008 you would have lost 10-30% (depending on growth allocation).  You not only did not make any financial headway in ten years but you lost considerable financial advantage.

Will things get better going forward?  I don’t believe so, at least not in the next few years.  So, it’s time to hunker down; get out of debt (perhaps your best return on your dollar right now); cut excessive spending; consider downsizing your lifestyle; save wisely and make informed and prudent financial decisions going forward.  By all accounts, America, as well as other countries, are in for a long-term bumpy financial ride.


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