Percentage savings of gross or net income?

[Elle]

I agree with Tad on this. The person working at Wal Mart
as an hourly
employee has the added advantage that to maintain their
standard of
living, they need to save a lower overall amount than the
"rest of us".

You, and it appears Tad, might note that I spoke of a person
escaping poverty, not simply maintaining his or her
currrent impoverished status in retirement.

What Tad and you wrote does not make sense to me in view of
what I wrote. I have no quick way of resolving this. Plus
the moderators appear to want to end the thread. So.

 

[Elle]

Doug kicked in my next point- SS is a higher percentage of
income, so a
smaller nest egg is needed.

What is the purpose of a nest egg, Jim? To live comfortably
or to continue living in poverty?

Planning for retirement is certainly not just about
replacing one's working income. It's about having enough to
afford health care, a safe place to live, etc.

 

[jIM]

The person working at Wal Mart

I spoke of a person
escaping poverty, not simply maintaining his or her
currrent impoverished status in retirement.

Easier to escape if nest egg replaces 100% of current income and Social
security would be close to a 30% bonus on top of this, so 130% of
income was replaced.

 

[Elle]

Easier to escape if nest egg replaces 100% of current
income and Social
security would be close to a 30% bonus on top of this, so
130% of
income was replaced.

Here's an alternative phrasing of what I am trying to say.

A person trying to escape poverty should, if possible, save
for retirement. I think we agree on that. OTOH this person
must understand that a 10-20% savings rate while being paid
very low wages for most of one's working life is unlikely to
successfully lift him/her out of poverty once s/he arrives
at retirement age. For comfort in retirement, a bigger plan
is needed, consisting of career advancement via education or
training or working very hard at one's own business,
hopefully a business that has been carefully researched as
to the chances of success.

Some consideration should also be given to the reality that
many blue collar jobs are physically crippling and can't be
worked for decades, or when the person finally stops, health
expenses are higher than average. Plus, the health benefits
while on the job for the working poor tend to be worse.

The working poor are in a unique category which I feel
demands unique treatment in comparison to middle class wage
earners.

 

[Will Trice]

Not that any of above is bad information or misinformation- what is
posted above is true and factual.

Not exactly. Steps 2 and 3 are (dreaded) rules-of-thumb and may not
apply to all people. Even step 1 could be debated in certain (possibly
rare) circumstances (for instance a person building a business).

-Will

 

[HW \Skip\ Weldon]

Not exactly. Steps 2 and 3 are (dreaded) rules-of-thumb and may not
apply to all people. Even step 1 could be debated in certain (possibly
rare) circumstances (for instance a person building a business).

To carry this a step further, my opinion is that rules of thumb and
detailed calculations are tools we use in the absence of knowing
enough about a person's unique situation. The best solutions in
personal finance come from understanding and empathizing with the
person's hopes, dreams and worries, and then, using common sense,
blending those things in with our answers. But we can't do that until
we really understand someone.

This is one weakness of internet forums - not knowing everything we
need to know - and it leads to false conclusions about how good
financial decisions are made.


-HW "Skip" Weldon
Columbia, SC

 

[Elle]

Steps 2 and 3 are (dreaded) rules-of-thumb and may not
apply to all people.

Even step 1 could be debated in certain (possibly rare)
circumstances (for instance a person building a business).

"Step" 1 does not apply to an awful lot of people because
many employers do not even offer 401(k)s with matching.
About Step 2, I think you're trying to say that, in
particular, it may not apply because of income limitations
on contributions to a Roth IRA.

Implied in the "guidance" is that the choices listed
actually are legal options for a person.

Would you prefer that the choices be prefaced with, "If
available, " "If you have the extra money," etc.? I think
such wording tends to deter newbies from even investigating
whether their employers offer such vehicles. Reports are
that too many people either do not take advantage of
employer matching or, when changing jobs, cash in their
401(k), taking the penalty and paying taxes. Backing this up
are the many newbies who have come here in the recent past
and seem surprised to learn about the matching on 401(k)s
and what the tax advantage of a Roth IRA is.

I do not take the word "guidance" to mean "you must."

 

[Will Trice]

"Step" 1 does not apply to an awful lot of people because
many employers do not even offer 401(k)s with matching.
About Step 2, I think you're trying to say that, in
particular, it may not apply because of income limitations
on contributions to a Roth IRA.

Implied in the "guidance" is that the choices listed
actually are legal options for a person.

Would you prefer that the choices be prefaced with, "If
available, " "If you have the extra money," etc.?

No, I agree that these types of conditions are implicit. But Step 2
(viewed only from a maximum after-tax return point of view - itself an
assumption) assumes that the tax rate for the individual in question
will be higher (or the same) in retirement than it is now. This may be
a good assumption in many cases, but in many others it may not (such as
an individual close to retirement who can guess his/her retirement tax
rate fairly well, or someone who has just had a major windfall).

I do not take the word "guidance" to mean "you must."

I should hope not.

-Will

 

[Elle]

assumes that the tax rate for the individual in question
will be higher (or the same) in retirement than it is now.

True.

The popular (-ist?) financial advisor Suze Orman also argues
that tax rates are likely going up for everyone, to pay for
our ailing social security and medicare system, the debt,
etc.

 

[joetaxpayer]

True.

The popular (-ist?) financial advisor Suze Orman also argues
that tax rates are likely going up for everyone, to pay for
our ailing social security and medicare system, the debt,
etc.

Whether or not the TV personality Suze is correct, I think there's room
in most planner's minds to consider tax diversification (i.e. a mix of
pre-tax and post tax investments) along with asset class diversification.

I'm not so convinced that the Roth is a bet on higher rates. The Roth
offers some unique features, such as no required withdrawals at age
70-1/2, and it can be left to a beneficiary for whom no tax would be due
at withdrawal.
JOE

 

[rick++]

It is gross income.

The federal subsized (tax deferred) 15% is a reasonable number.
Many scenarios I've computed suggested it takes around 25 years
at this rate to cover family and retirement needs.

You might think you have more than 25 years. However it takes
many to until 30 to get past college and student loans.
Plus the at the other end the recent Boston College Retirement Center
report finds 60% people between 50-65 expereince a life-changing
event that slows savings (two biggies are job loss and medical).