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February 02, 2007 Negative Savings Rates - What it can mean to your future.
Recently the US Commerce Department released data showing that the national personal savings rate for 2006 was a negative 1 percent. This is the second year in a row where personal savings was negative, and only the forth year in the history of the US. The last, and only other time the population was spending more than they earned was during the Great Depression. While this statistic is frightening enough, the fact that the US economy is experiencing growth above inflation as are personal income levels is a cause for serious concern. Without talking much further about the dangers this represents to the future strength of the US economy, and specifically the dollar, it is important to look at this figure and understand how it could effect your personal retirement planning, especially if a big part of that plan is an assumed sale of your business in the future.
There is no question that owning and operating a successful private business can lead to a very lucrative exit when you are ready to retire. But a big assumption to this retirement strategy is that somebody will be able to purchase your business when you are ready to sell. If the current trend of the American public operating at a deficit continues, the credit-worthiness of prospective borrowers will steadily decline, making securing necessary funds for a transaction as large as a business purchase a much higher hurdle to clear. Moreover, if instead you choose to sell your company for a lower upfront payment, thus easing the burden on the buyer on day one, and structure an earn-out into the agreement, you will be putting your future wellbeing in the hands of whomever you sold to. This understood risk will be compounded by the fact that your future income is dependent on the American economy being able to continue to thumb its nose at all established macroeconomic theory and avoid the large and lengthy recession prescribed by our long standing current account and budgetary deficits. No company, or economy for that matter, can operate in the red indefinitely. Eventually all debts must be repaid, and in one fashion or another the American citizens and their government will have to do the same. Since we are all investors in the US economy, whether we like it or not we will each have to pay our part of what is owed. By accounting for this added expense in retirement or other long term personal savings plans, you can avoid underestimating how much you will need to insure all your other future plans come true.
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