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Q: I have often heard that people should be saving 10 percent, on average, of their earnings for retirement. They could, for example, put 10 percent of paycheck earnings in their 401(k) plan. But is the 10 percent rule per household or per individual?

We are both 45 years old. I have $68,000 in an IRA and $15,000 in my company 401(k). My wife has $88,000 in her 401(k), and we are both contributing 6 percent to each 401(k).

A: Most of the rules of thumb for retirement savings planning are wrong because they fail to take into account the connection between savings and retirement income. Here is an extreme illustration: It doesn’t make sense to save 40 percent of your income today with the goal of replacing 80 percent of your income in a distant tomorrow.

Such rules also don’t take into account the demonstrated reality that household spending peaks between ages 45 and 55. After that, it slowly declines.

If I had to pick a single rough number for how much we should save, I’d pin it on 10 percent of total household wage income.

In reality, however, you’ll need to save less if your income is low and not rising, and more if your income is high and rising fast.

You recently wrote: “Fortunately, we can regard the majority of ETFs as useless garbage. We can ignore them.” Since ETFs are basically just buckets of stocks, I don’t see how they can be written off as useless garbage. Please explain.

A: According to the website, there are now 1,478 exchange-traded funds and exchange-traded notes, an indication that the financial-services industry believes that if you put enough monkeys to work at typewriters, one of them will eventually produce the financial equivalent of Shakespeare.

You can buy an ETF for almost any purpose, but the main reason for the existence of many highly focused ETFs is to provide a vehicle for investors to speculate on price moves while the ETF vendor collects fees for offering the ETF.

If you want to speculate, you can certainly do it with ETFs. You can speculate with ETFs that are leveraged with debt, with ETFs that are leveraged with options.

You can speculate with ETFs that promise to go up when their asset class goes down in price. At the speculative end of the ETF spectrum you can pay really high annual expenses, and you can also lose money from buying at a premium to underlying net asset value of the basket of stocks held.

Similarly, you can sell at a discount to the underlying net asset value of the basket of stocks held.

Basically, you can get skinned going in, while you hold and when you leave. That’s great for Wall Street, lousy for you.


Copyright, 2013, Universal Press Syndicate