Net national savings as a percentage of gross national product, which includes the savings of business, households, and the government, has been on a significant decline since the 1950s – from an average of 9.1% annually in the 1950s and 1960s, to 8.5% in the 1970s, to 4.7% in the 1980, to 2.4% in the 1990s. While the federal deficit is a significant factor in this decline, personal savings have also been declining, from an average of 7.8% of disposable income in the 1980s to only 4.5% in the 1990s (Source: Securities Industry Association Trends, October 4, 1995). This low level of savings both concerns and bewilders economists.

WHY ARE SAVINGS IMPORTANT TO THE COUNTRY?

At first glance, it would seem that savings hurt, rather than help, the economy. If consumers save rather than spend their income, current sales for stores, service establishments, and manufacturers will decline, putting a damper on jobs and income. However, this is only a short-term effect.

In the long term, these savings will be used to make investments, which will finance modernized equipment, new construction of homes and factories, and research and development of new products. These investments, in turn, create new jobs and more income.

While savings have always been important to the country, many see increased savings as the only way to ensure that the baby boom generation will have any chance of enjoying their retirement years. Corporations are increasingly moving from defined-benefit pension plans, where they make contributions, to defined-contribution plans, where employees must make contributions. The financial cost of providing current Social Security benefits to the huge number of baby boomers is so high that almost everyone believes that the system will have to be changed, possibly drastically. Thus, savings will be very important to the future standard of living of a significant portion of the population.

However, baby boomers have not increased their savings yet, which is puzzling to the many economists who believe that savings habits can be explained by the life-cycle model. According to this model, young consumers often spend more than they earn as they set up their households, purchasing homes, cars, furniture, etc. Middle-age consumers are generally the biggest savers in the economy. With their debts largely paid off and retirement looming, they have the most free income along with a strong incentive to save. Once retirement is reached, these individuals become net spenders since this was the purpose for the savings.

WHY AREN’T THE BABY BOOMERS SAVING MORE?

Based on this model, it was widely believed that the savings crisis would correct itself as the baby boom generation approached middle age. So far, this has not been the case. Several theories exist as to why this has not happened.

Social Security and Medicare taxes have increased dramatically, up 32% since 1980 and 60% since 1970 (Source: Investor’s Business Daily, March 14, 1995). Not only are families now left with less income for saving, but the government is taking these taxes from the people most likely to save and giving the money to retirees, the people most likely to consume the income. Also, knowing that the Social Security system exists, many individuals are less inclined to save for their own retirement, believing the government will take care of them.

Others believe the federal tax code provides little incentive for saving, with few opportunities to reduce taxes through saving. In fact, tax laws have taken many incentives away in recent years, such as phasing out deductions for individual retirement accounts and reducing maximum contributions to 401(k) and other pension plans.

HOW CAN WE INCREASE SAVINGS?

At a national level, many believe that the government needs to increase incentives for saving. Some of the more conservative suggestions include expanding deductions for individual retirement accounts, lowering capital gains tax rates, and simplifying pension plan rules and regulations so that more companies makes these plans available to their employees. More aggressive alternatives include eliminating the current income tax system in favor of a consumption tax and allowing individuals to take deductions on their tax returns for savings. It is impossible to predict when or if any of these incentives will become law.

On a personal level, whether or not the government gives us incentives to save, we must take the initiative to increase our own personal savings rate. In order to fund a secure retirement, we need to save a significant portion of our current income. Although the task is not easy, it is essential. If you’d like help finding ways to do this, feel free to call us at (800) 878-4036.

BEFORE INVESTING IN STOCKS

Many people pick up a number of stocks over the years, never developing a methodology for selecting stocks. Yet, stock investment decisions can be easier if you approach stocks in a systematic manner.

1. IDENTIFY YOUR INVESTMENT GOALS. It is important to carefully identify your goals before you start investing. Are you investing for the long or short term? How much money do you have to invest? Are you looking for income, appreciation of capital, or a combination of both? How much risk can you comfortably assume? What rate of return are you expecting from your investments?

2. CHOOSE THE TYPES OF STOCKS YOU ARE INTERESTED IN. When thinking of stocks, most people believe that they only need to choose between common and preferred stock. But there are many categories of stocks, including:

BLUE CHIP — high-quality stock of major, well-established companies with a history of earnings growth and dividend payments in good and bad times.

GROWTH — stock of a company whose sales and earnings are growing faster than the general economy and most other stocks. These companies normally invest their earnings in the company to generate further growth, paying little in dividends.

INCOME — stock of a company that pays stable, and often significant, dividends, providing investors with a steady stream of income.

DEFENSIVE — these stocks are considered stable and comparatively safe in recessionary periods and include utilities, banks, and food companies.

CYCLICAL — the earnings of these companies tend to fluctuate sharply with the business cycle, such as auto companies.

SPECULATIVE — these stocks are perceived to have much more risk than other types of stocks and frequently include new issues and glamour stocks.

3. DECIDE ON A STOCK INVESTMENT STRATEGY. This strategy will help determine what types of stocks you should invest in and how much time you will need to devote to the investment process. With a buy-and-hold strategy, you will select a core group of stocks that will be held for the long term. A strategy of broad diversification involves investing in stocks in a variety of industries to reduce the effects of any one stock or industry on your overall return. If you want to time the market, you will change your investments depending on your view of market conditions. Some investors prefer to invest in one industry that they believe will outperform the market, while others look for stocks that they feel will increase dramatically in a short period of time.

4. ANALYZE INDIVIDUAL STOCKS. Before investing in an individual stock, it is important to research the stock carefully. This will involve reviewing financial statements, annual reports, the prospectus if a new issue, and other public information.

The process of selecting stocks can seem confusing so feel free to call at (800) 878-4036 if you need help with any of these steps.

TACKLING THE EFFECTS OF INFLATION

Now averaging 3% annually, inflation no longer seems like a major threat to our way of life. Yet, over a period of years, even 3% inflation can have a dramatic impact on your purchasing power. After 5 years of 3% inflation, $1 is worth 86¢; after 10 years, 74¢; and after 20 years, 55¢.

It is important to take steps to tackle inflation:

Choose investments with returns greater than the rate of inflation. Your rate of return is not what is important; what is important is your rate of return after considering the effects of inflation and taxes. An appropriate target for many investors would be an after-tax rate of return 3% greater than inflation.

Tax deferral of contributions and earnings can help in your battle against inflation. Consider investing in 401(k) and 403(b) plans, individual retirement accounts, Keogh plans, simplified employee pension plans, and annuities. Although you will have to pay taxes when you start making withdrawals, your nest egg will grow on a tax-deferred basis so that you will have a much larger nest egg at that time than if you had been paying taxes currently during the years. Thus, your purchasing power will be higher, helping you combat the effects of inflation.

Retirees need to be especially sensitive to the effects of inflation when choosing investments. With many retirements now lasting 15 to 20 years, inflation can have a significant impact during that period. Thus, it is important for retirees to choose investments that will hedge against inflation. Also, most pensions and annuities do not make adjustments for inflation, so that other income sources will have to fill an increasing gap over time.

Review the limits of your insurance coverages periodically, especially homeowners, renters, and umbrella coverage. While some policies will increase the limits to take inflation into account, others will not.

Don’t buy into the argument that it is better to borrow and spend money now, paying the debt later with "cheaper" dollars. Many people use this argument as an excuse to get into too much debt. There is no guarantee that it will be any easier to pay those debts later.

CHANGING FINANCIAL CONCERNS

At different points in your life, you will be concerned with different financial matters. While it is true that different individuals will face these phases earlier or later than other individuals, the cycle of issues proceeds in a fairly predictable pattern over your lifetime.

YOUR 20s AND 30s

Establish solid financial habits, since the money habits you develop now will set the financial tone for the rest of your life. Now is a good time to set up a record keeping system, monitor your cash flow, and develop a workable budget.

While it is important to establish good credit, it is even more important to keep debt under control.

Set up a contingency fund equal to two to six months of living expenses.

Start a regular savings program, aiming to save at least 10% of your gross income.

Invest for the long term.

Most individuals are anxious at this age to buy their first home. It is important to make sure that you can make the mortgage payments without straining your budget.

Start saving now for your children’s education.

Prepare a will, naming a guardian for your children.

YOUR 40s AND 50s

Your children are probably now in college and you will have to help them finance their college education. If you did not accumulate sufficient savings, you may need to take on debt in order to help them.

At the same time, you may find that your parents also need your help with financial matters.

It is imperative that you seriously start saving for your own retirement. Now is a good time to evaluate your investments.

Take time to plan your estate.

YOUR 60s AND BEYOND

Before you retire, review your finances carefully. You may want to consider part-time employment, both to supplement your income and to occupy some of your time.

Review your estate plan. Consider the use of a living will, health care proxy, and durable power of attorney.

Re-evaluate your gift-giving plans for family members and charities.

Provide your family with the details of your finances.

If you need help with your financial concerns, feel free to call us at (800) 878-4036.

NEWS AND ANNOUNCEMENTS

We’ve changed our names to better reflect all that we do!

Wink Accounting Services, Inc. after 15 years has become Wink Tax Services. Over the years, we have found the bulk of our business has moved to Income Tax preparation for individuals, estates, partnerships and small business. Along with representation before the I.R.S. in our capacity as Enrolled Agents. The world is changing as we have too.

R.G. Winke & Assoc., Inc. after 12 years has become R & D Financial Services, Inc. This better reflects our specialties as licensed securities brokers and independent insurance agents. Along with other services such as mortgages, real estate, collectibles and precious metals such as gold, silver and coins.

Our names have changed but we have not.