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).

Elle wrote:
- quote -

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

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
[The guidance to contribute to a Roth IRA]
- quote -

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.

Elle wrote:
- quote -

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).

- quote -

I should hope not.

-Will

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

"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."

On Fri, 4 Aug 2006 18:50:33 -0500, Will Trice
<wwtrice[at]paragondynamics.com> wrote:

- quote -

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

jIM wrote:
- quote -

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

"jIM" <noreplysoccer[at]hotmail.com> wrote
- quote -

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.

- quote -

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.

"jIM" <noreplysoccer[at]hotmail.com> wrote
- quote -

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" <noreplysoccer[at]hotmail.com> wrote
- quote -

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.

Douglas Johnson wrote:

- quote -

Right. www.ssa.gov will give an estimate of benefits.
Someone earning $20K this year and retiring (assuming similar level of
earning going back (to just $5400 in 1984 for example*) will receive
$6684 per year, not great, but 33% of their prior earnings. I don't know
if Walmart does a 401 match, but a 3.5% deposit, 3.5% match will get
this person up to replacement income.

*I think the web page underestimates prior income. In 1984, minimum wage
was $3.35, or $6968 for the year. That would bump the benefit up a bit
further.
JOE

Douglas Johnson wrote:
- quote -

smaller nest egg is needed.

"jIM" <noreplysoccer[at]hotmail.com> wrote:

- quote -

I don't want to kick off a debate about the viability of Social Security, but
currently, our friend at Walmart will have a much larger percentage of their
income replaced by Social Security than higher wage workers, so their required
savings will be significantly less.

It is also worth pointing out that this discussion of saving percentage has
focused on saving for retirement. You also want to save for other purposes,
including down payments on houses, purchase of cars and other major items,
college tuition....

This saving is in addition to the retirement savings being discussed.

-- Doug

Tad Borek wrote:
- quote -

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".

The resulting nest egg will be smaller. But the "lifestyle" they had
to live on with 90% or 80% of their gross pay from Wal mart is a much
more frugal lifestyle than I could imagine. They would need less
savings to maintain this.

Incremental saving percentages (changing from 10% to 12% savings rate,
for example) would probably improve this Wal mart employee's standard
of living in retirement much more than if I increased mine 2% or Bill
Gates increases his savings rate 2%.

This guideline of "absolute percentage" works better for lower income
workers, IMO.

Elle wrote:
- quote -

I strongly disagree. In fact much of my personal inspiration comes from
individuals who made enormous leaps through that sort of scenario.

Granted there is a certain percentage of America that is at the level of
privation, to borrow Galbraith's favorite term, and they just don't have
the dollars to devote to savings. But beginning relatively early in the
earnings scale, people begin to divert a great deal of money to wholly
discretionary spending. By definition if it's discretionary, it can be
saved instead, and it doesn't need to be spent during retirement -
raising the savings level, lowering the retirement-savings need.

Satellite TV w/premium channels, cell phone, low-mileage vehicle, too
much house, buying on consumer credit - these are very common
consumption choices that can easily represent a marginal 10%+ of income.
Actually, car choices are a big part of it, because any of them can
require a $1500 repair, which might represent 5% or more of income for
many people.

-Tad

Elle wrote:

- quote -

Yup, I made a faux pas here. I was doing the math backwards, using the
10% figure and the combined total of $15K+4K for 401 and IRA, I meant
that the advice covers most people. But you are quite right that Roth
stops at the levels above. My numbers hold if you flip to non-deductable
IRA. Which, by the way, in 2010(?) we wil be allowed to convert to Roth
without penalty. That you for the fact-check.
JOE

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
Elle
- quote -

The 10%-20% savings "rules of thumbs" assume a person does
not want to improve his or her standard of living, for one.

It's my now nearly regular gripe: There are too many
assumptions that folks are all making a decent wage and will
throughout their lives.

snip
- quote -

As I've stated before (in another thread a week or so ago),
I don't have a huge objection to this rule of thumb,
especially for a young, professional person. Who, still,
probably has either poor math skills, poor budgeting skills,
or parents who never discussed saving for retirement at the
dinner table (or saving period).

Unless the basis for this guideline is explained and
understood, then the young person is being asked to blindly
trust that his current income, with raises reflecting
inflation and possibly some career growth, will leave
him/her comfortable in retirement. Not necessarily so.
Consider the kid who is working at Wal-Mart and following
your guidance. It's a mistake to think a person can escape a
retirement of poverty by simply saving 10% to 20% a year of
their gross income. Sometimes a radically different plan,
having nothing to do with what fraction is saved, is
necessary.

- quote -

That's somewhat of a different issue. FWIW, I agree about
how never seeing the 10% will ease the pain of saving
regularly for retirement.

- quote -

I thought the AGI limits were $110k for single people, $160k
for married.

- quote -

Yearly review is what I think is appropriate. This will help
refine decisions made on mere rules of thumb, for one thing.
Saving for retirement is a dynamic process, not a one-time
decision, etc.

- quote -

Bob, that's true. Also, if you intend to rely on investment income
alone, you also don't have to pay approximately 6% towards social
security anymore, so you only need to replace 79% of your
pre-retirement income.

With that being said, some people plan to spend more time doing
relatively expensive activities during retirement to fill up all of
that time previously spent working, such as travel, certain hobbies,
maybe buy a boat, etc. So the actual cost to maintain a desired
retirement lifestyle for some people may actually increase relative to
the cost of their pre-retirement lifestyle.

zxcvbob wrote:
- quote -

Bob, at some level, your observation is correct.
I had the privelege to meet Astronaut James Lovell, whose claim to fame
is having been played by Tom Hanks in the movie Apollo 13. In his speech
he remarked how they got to the moon while at any given moment they were
aimed somewhat nearby, never right there.

Since the 15% is a target, based on too many variables, return,
age/health at retirement, etc, it's too premature to try to tinker with
the actual goal. 100%, 85%, 50%??

As I whittle away the expenses I won't have at retirement, mortgage,
college savings, retirement savings, I quickly find that 40% or more of
my monthly outlay won't be there when I retire. But I keep the goal at
100% just as a target. Worst case, I'll leave a nice inheritance and
fund some charities. Best case, it will be a crash-proof (i.e. it will
survive a crash and not impact our spending) portfolio that will give
the Missus and me unlimited options.
JOE