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High income, low net worth could doom retirement

Have you ever thought that if you were making $100,000 or more it would be easy to save money? Apparently it isn't, even for people making upward of $250,000. There's no shortage of high-income earners who have relatively little net worth.

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It's not that they don't save; many max out their 401(k) plans religiously. But socking away $15,500, or $20,500 if they're eligible for catch-up contributions, annually isn't going to provide for their current lifestyle when they're retired.

"We've always referred to it in our practice as the 105 percent rule," says P.J. DiNuzzo, chief investment officer at DiNuzzo Investment Advisors in Beaver, Pa. "If they're making $100,000, they spend $105,000. If they're making $200,000, they're spending $210,000. They say they'll start making it up next year, and then next year turns into 10, 15 or 20 years down the road and they've wasted a tremendous opportunity to prepare for retirement."

The No. 1 reason earners in the $100,000 to $249,000 bracket give for slacking off on savings is that they need the money to pay bills, according to an HSBC Direct survey. And that would certainly seem to imply, as DiNuzzo indicates, they're living beyond their means.

Claimed household income
What prevents you from saving more? Select all that apply: I need to pay bills. I don't make enough money to make ends meet. Something unforeseen always comes up. I want some spending money. I don't feel the need to save. Other.
Less than $25,000
$25,000 - $49,999
$50,000 - $74,999
$75,000 - $99,999
$100,000 - $149,000
$150,000 - $199,000
$200,000 - $249,000
$250,000 +
Prefer not to answer
Source: HSBC Direct

Spenders or savers?
Many of these high income earners who come up short at the savings game are entrepreneurs who excel at running a business or professionals who receive annual raises and bonuses that can mean a 10 percent annual increase in gross pay. They're bright, and it shouldn't be difficult for them to figure out that they're going to need a hefty nest egg to continue their lifestyle beyond their working years.

Michael Prebenda, senior vice president at HSBC Direct, says people have belief sets that guide them to be spenders or savers. "You'll find people with low incomes who save a large percentage of their income because they believe strongly in savings. People who aren't inclined to save can't visualize the need to save for something that's 10, 20 or 30 years down the road. It's not tangible.

"It's often quoted that in the U.S. we have a negative savings rate. That's driven by 70 percent of the population that's spending well in excess of their income annually and 30 percent of the population, roughly, that's saving a heck of a lot of money. It's that 30 percent who have a good feel for cash."

Next: "We need to get them into the groove of saving money."
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