Monthly Finance Message:

Financial Frames of Reference

November 2011

Barbara O'Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

Research indicates that people understand portion sizes better, and may be motivated to eat less, when food portions are mentally compared to the size and shape of common objects. Although measuring cups and food scales are the most accurate way to determine food portions, they are impractical to use in many situations. In one study, so-called portion size measurement aids (PSMAs), such as golf and tennis balls and a deck of cards, were found to significantly improve estimations of portion sizes.

Similarly, personal finance recommendations are easier to understand with some easy frames of reference. People often fail to act upon financial advice because it is stated in percentages or requires mathematical calculations. Percentages are hard to relate to and people tend to tune out. Nevertheless, if you take the time to convert percentages into dollar figures, the results can prove quite helpful. Below are seven examples of common financial recommendations, with percentages translated into dollars, based on a worker with a $50,000 gross income:

Save at least the amount that your employer will match in a 401(k) plan - Find out the maximum amount of worker contributions that your employer will match. If your employer matches 6% of pay, save $3,000 ($50,000 x .06) and you'll receive $3,000 in "free money." $3,000 of annual savings requires weekly savings of about $58.

Plan for at least 70% to 80% of pre-retirement income to live comfortably in retirement - 70% to 80% of a $50,000 income is a $35,000 to $40,000 annual income in retirement. 75% is $37,500. Personalized savings calculations are best, however, rather than relying on general guidelines. Visit the Ballpark Estimate at www.choosetosave.org to make a simple retirement savings calculation.

Save 10% of gross income if you're a young adult and up to 15% to 20% of gross income if you are a middle-aged "late saver" in your late 30s and 40s with no retirement savings - A young worker would save $5,000 annually and an older worker, $7,500 to $10,000. If these amounts are difficult to achieve, start saving less but gradually increase the amount saved over time.

Purchase disability insurance equal to 60% to 70% of your gross income - A worker earning $50,000 should have coverage ranging from $30,000 ($2,500 monthly) to $35,000 ($2,915 monthly).

When you retire, withdraw 4% of your portfolio annually, increasing the amount with inflation each year, to avoid running out of money - If, at age 65, you have $400,000 saved for retirement, you should withdraw $16,000 (400,000 x .04) in the first year and then increase this amount each year for inflation (e.g., $16,000 x 3% inflation rate = $480 for a total withdrawal of $16,480 in year 2).

Each time you get a future pay increase, keep half and use half to increase tax-deferred retirement plan savings - If you get a 2% raise to a $50,000 income ($1,000), keep/spend $500 and contribute an additional $500 to your 401(k) or 403(b) retirement savings plan.

Invest in employer tax-deferred retirement savings plans because contributions are made with "before-tax dollars." Your contribution is offset by tax savings based on your federal marginal tax bracket- If you contribute $3,000 to a 401(k) or 403(b) plan, your taxable income would be $47,000 instead of $50,000. If you are in the 25% federal marginal tax bracket, you would save $750 (3,000 x .25) on federal income taxes that you would otherwise pay. Thanks to this tax savings, the actual (after-tax) cost of a $3,000 retirement plan deposit is only $2,250 ($3,000 - $750). Taxes on contributed amounts and savings plan earnings are not taxable until they are withdrawn, typically at retirement.


  1. Rutgers
  2. Executive Dean of Agriculture and Natural Resources
  3. School of Environmental and Biological Sciences