Middle class crunch

[Scanner]

Retirement? Fuhgeddaboudit - Series Home

[disneysteve]

"Given the financial state of many middle-class families, however, saving that 10% of income recommended by most planners is extraordinarily difficult."

I haven't finished the whole article, but this statement bothers me. I think, in many cases, it is a huge cop-out. People need to make saving a priority in their lives. It needs to come BEFORE dining out, BEFORE nice vacations, BEFORE iPods and TiVos and premium digital cable and plasma screens and SUVs and manicures and massages. It needs to come BEFORE Abercrombie and Hollister and Macy's. Much of what is common among the middle class today are things that were considered upper class a generation ago. People need to learn to put savings first and then live on what is left after that. Until people learn to live below their means, whatever those means may be, the retirement picture will be bleak.

[DebbieL]

I agree Steve. If you are middle class, saving 10% shouldn't be too difficult. If you are middle class, drowning in debt, living in a McMansion, buying jet skis, vacation properties, etc - I have NO SYMPATHY.

[Snowgirl]

I'm with Debbie & Steve on that, I think the problem is mostly wanting to live over your means. Middle class people now expect many luxuries as natural, and standards of living have risen. So much that the "real rich" now shy away from Gucci purses and stuff because too many soccer mom have them. Adding to that is the younger workforce who was raised in middle class families where parents after many years scrimping & saving could afford life luxuries: nice vacations, McMansions (2nd or 3rd home), designer clothes, ..., and now expect those thing at the start of their career. Sure then, they can't afford to save for retirement, because of they have to pay for the jet ski, the week-end cottage, the European vacation, the private school, ...


I see this around me a lot, but usually refrain from commenting on it because my own situation gets thrown back at me. Sure we are 30 year old with good salaries and have no kids yet, but it always irks me to hear: "Wait till you have kids, ...". Not everyone around me have 2 great incomes like us, often the wife/girlfriend has a lower paying job, but still, they have a bigger/newer house than mine (because the kids "need" it), fancier clothes, 2 cars, cell phones, ... We are lucky in some things: degrees in high-paying jobs, family help to buy first home when market was low, working in the same neighbourhood for the car thing, ..., but we also see eye-to-eye on the reasonable spending/saving things (well, I like to save more, but my boyfriend gently indulge me!). We made choices to obtain that quality of life, those vacations, and many complainers could make the same choices up to a certain extend.

[illinigamer]

Originally Posted by Snowgirl

Adding to that is the younger workforce who was raised in middle class families where parents after many years scrimping & saving could afford life luxuries: nice vacations, McMansions (2nd or 3rd home), designer clothes, ..., and now expect those thing at the start of their career.

As someone who falls into the "younger workforce," I could not agree more. I have even had friends who had a rough idea of what I make ask me what I spend all my money on. They wonder why I have so much less stuff than them while making so much more. They cannot seem to fathom why I would rather "spend" money on 401k, Roth IRA and down payment savings than flat screen TVs, Wiis and cars. Many already have plans for what they are going to spend their next raise on. They compare themselves to their parents now, instead of their parents 30 years ago.

That being said, there is the minority (and most my closest friends fall in this category) that realize the huge value of saving so early. Some of them are putting over 50% away in their mid 20s.

[DebbieL]

Congratulations to ANYONE who catches on so young and is saving over 50% of their earnings. I'm impressed. I'm sure they are (unfortunately) in the minority.

[rizzmo]

Good job on the 50%! Is that 50% of gross or net?

Ok slightly off topic here, but what is the income level for a middle-class family?

[Ima saver]

I started at a very young age saving 10% of all I made and I saved it (put away) first before I paid the bills.
When I was a waitress, I always put away 10% of all my tips when I came home from work. Sometimes, it was only $2, but I put it away. (They tipped very poorly in a rural town)

[LivingAlmostLarge]

I think the problem (and I'm a 20-something), is many of us want to live life now. There is no time for sacrificing. I know ton of young people travelling the globe, driving a BMW, Benz, etc, and I know how much they are making. I am doing the same thing as them or same as my DH. We can't afford all those trips, all those weekends away, all those fancy cars, etc.

But for some reason it's affordable for them. I guess the problem is wanting it now. It's easier to just put it on the card and go and worry about it later. And yes some have actually said that to me.

[Scanner]

I know people here naturally want to jump on abberant behavior (and I have done my share) but I think there more at work here than just an irresponsible middle class.

I don't want that to be the "cop-out" that DisneySteve speaks of and point the finger eleswhere; I think there's some truth in Americans needing behavior modification.

But I also think college, healthcare, and housing are getting ridiculously unaffordable.

And those are the 3 major debts that Americans are saddled with:

1. Student loans
2. Medical bills
3. Mortgage

The consumer debt is insidious because that's the "gap filler." When you run out of money for diapers, you put it on your c/c. Maybe that's wrong but I can kind of see myself doing it if I were in that situation.

I also think most of the jobs being created in the American economy are "transitional" type of jobs (casino jobs probably bias my opinion being near Atlantic City).

I am not knocking hotel and resteraunt jobs. . .but I am not sure we can build a middle class around it.

Here is another link:

USATODAY.com - Middle class barely treads water

[Lindahfx]

Somewhat related... if your target is to save 10% (or whatever) and your employer matches x% of your savings, should you save the difference between what your total % savings is and your employers % OR do you save the total % and whatever your employer contributes is a bonus?

[disneysteve]

Originally Posted by Scanner

And those are the 3 major debts that Americans are saddled with:

1. Student loans
2. Medical bills
3. Mortgage

Scanner, the problem is that at least 2 of those 3, and some might argue 3 of 3, are at least partially controllable.

1. Student loans - I mentioned this in another thread this week. If you are looking to go into a career that is traditionally low-paying, and that's where your passion lies, by all means go for it. But don't go getting an expensive degree from some elite private school to do so. Instead, attend community college and/or a reasonably priced state school. It makes no sense to rack up 50K or 60K or 75K in student loans to become a social worker who will be earning $30,000/year. That's just asking for trouble.

3. Mortgage - Well, this one is easy. Don't buy a house you can't afford. Go back to the time-tested guidelines that housing costs shouldn't eat up more than 28% of your income and total debt servicing shouldn't exceed 36%. And make a darn downpayment. If so many people wouldn't have bought homes that were priced at 5 and 6 times their income (rather than the 3x guideline) with 100% mortgages with adjustable rates, we wouldn't be in the mess we are in now. The lenders are partly at fault for making those loans, but ultimately the responsibility rests with the borrower. What? You say using those guidelines a lot of people couldn't have afforded their houses. Darn right. The fact is that not everyone can afford to buy the house they want in the place they want, if they can afford to buy at all. Home ownership is at an all-time record high, but that isn't a good thing if millions of those homes were purchased by people who couldn't really afford them.

Your USAToday link is from 2003 and is primarily drawn from the book, "The Two Income Trap". I've read the book and don't totally agree with the premise.

[disneysteve]

Originally Posted by Lindahfx

Somewhat related... if your target is to save 10% (or whatever) and your employer matches x% of your savings, should you save the difference between what your total % savings is and your employers % OR do you save the total % and whatever your employer contributes is a bonus?

I think you save as much as you can save. Personally, I'd shoot for at least 10% of my own money, not counting the employer match.

[safari]

I am contributing 10% to my 401(k) plan and the company adds another 4%. 10% is the maximum I am allowed to contribute because I am considered a highly compensated employee. So that's automatic 14% toward retirement. In addition, I am saving an extra 25% of my salary in taxable accounts, which includes short and long term savings. That money goes into various savings, money market, CD and investment accounts. I am still able to enjoy my life, drive a luxury car, watch a big screen TV and vacation in Europe every year. But I don't spend much on other stuff, like clothes, music, going out, etc. You just have to prioritize what's important to you, while making sure you save enough for retirement. Saving and enjoying the life are not mutually exclusive. My goal is to retire at 55.

[Snowgirl]

Originally Posted by Scanner

I know people here naturally want to jump on abberant behavior (and I have done my share) but I think there more at work here than just an irresponsible middle class.

I don't want that to be the "cop-out" that DisneySteve speaks of and point the finger eleswhere; I think there's some truth in Americans needing behavior modification.

But I also think college, healthcare, and housing are getting ridiculously unaffordable.

And those are the 3 major debts that Americans are saddled with:

1. Student loans
2. Medical bills
3. Mortgage

The consumer debt is insidious because that's the "gap filler." When you run out of money for diapers, you put it on your c/c. Maybe that's wrong but I can kind of see myself doing it if I were in that situation.

Here is another link:

USATODAY.com - Middle class barely treads water

Here I must disagree with you about the reasons of that crunch. You see, this hight debts/low savings situation is quite the same up here in Canada as it is in the States. However, medical bills are inexistent because of public health care, and student loans are much lower (as I stated in another post, tuition is 3-4k$/year, so student debts are around 20-30k$ max). The people complaining around me usually don't have so many debts (that I know of!), they just spend all their money on good stuff and justify it through their kids or their own sanity. That's what your first article hinted of. Why else would you need 72000$/year in retirement? With that kind of money, there is room for savings.

We're not talking about not having money for diapers, but choosing between a Caribbean vacation and retirement savings. For example a guy who just moved into another house, but thinks the master bedroom is not intimate enough with all the kids room around, and decided to build a master suite addition!

The second article is more about lower middle class facing tougher choices, single parents, blue collar workers, .... They are more affected by cost of living increases. But the couple trying to save for the kid college, I don't buy. You provided a good education, all the love and necessities to your kid, now you should save for your retirement before the college. At this point, your kid is old enough to go for what he wants, if you can't provide it. Otherwise, he'll have to provide when your old & poor!

[cptacek]

Originally Posted by Snowgirl

We are lucky in some things: degrees in high-paying jobs

This wasn't luck! This was a good decision! Good for you. Don't apologize for it.

[tripods68]

A broader picture to look at, real wages simply hasn't keep with up with the cost of housing and health care cost coupled that with negative savings rate and increasing credit card debt. No wonder Americans has very little to show for.

The Motley Fool's Credit Center mind-blowing statistics 2004 Data:

Total consumer credit: $1.7 trillion.
Credit card debt carried by the average American: $8,562.
Total finance charges Americans paid in 2001: $50 billion.
Percent of U.S. households deemed credit worthy by the lending industry: 78%.
Number of credit card holders who declared bankruptcy last year: 1.3 million.

Americans Have Negative Savings Rate, Consumer Credit Grows In 2005 At Slowest Pace In 13 Years - CBS News

[PrincessPerky]

I cannot sympathize with buying diapers on CC,,,if you already spent half your check on luxuries...sorry buy the diapers first, put some extra away for 'just in case' (in case your kid has a reaction to some food, decides to regress on Potty training..or just plain manages to pee in mid change multiple times..there a tons of reasons why a normal amount of diapers wont work sometimes).

I do have kids, and 'wait till you have them' is no excuse.

It is all about priorities, and labeling your kid as a priority so you can buy them fancy toys or fancy clothes, classes, etc, is NOT the same as putting your kids first.

Not that I don't understand the desire to eat out because of kids, and the desire to hire a maid..because the boys pee on the potty! I don't do that, my husband doesn't do that, it is the kid!

Or the desire to 'escape' because of kids....really I get it. But just because they are cuter than most other reasons to hire a maid, eat out, or take a vacation, doesn't make it any less of an excuse! (on the other hand I really want a maid!)

What I don't get is the desire to buy a big screen TV...for the kids...err their brain needs it less than you do...(though if you have the loot and want one, whatever-just don't go buying diapers on CC tomorrow to make up for it, please)