Report: Overconfidence in Home Values Led to Decline in Savings

June 29, 2006 ( - According to new research by the Securities Industry Association (SIA), almost half of American households are not saving at all and two thirds are not saving enough to last them through retirement.

According to a press report, Retirement Savings: By the Numbers identifies the “wealth-effect” – when individuals save less because they perceive their net worth has increased – as the main factor in the decline in savings. Specifically, the appreciation of housing prices generated a rise in net worth, which helped extend the wealth-effect to lower income groups.

Other factors that hinder Americans’ abilities to save include higher fuel prices and rising interest payments eroding consumer purchasing power, according to the release. About half of all baby boomers will be unable to maintain their standard of living during retirement, and as many as 20% of baby boomers will live in poverty after they reach the age of 65, about twice the number of seniors in poverty today.

Other findings of the SIA study include:

  • Almost half of many Americans’ net worth is based on the value of their home. Given this concentration, the decline, or stunt, of housing and the rising cost of servicing mortgage debt would further detiriorate net worth and measures of the adequacy of retirement savings.
  • Both the number and percentage of households that owned a retirement account – an individual retirement account (IRA), a 401(k) or other employment-based plan – have fallen since 2001. Participation rates are declining, and those who hold retirement accounts underutilize them.

The SIA study is here .