Q. I am a social worker and have worked most of my professional life (I'm 38) in the nonprofit, social services world. My salary has never exceeded $28,000. I read in your column and other places that I must save 15 percent of my income for retirement.

My question is this: When people talk about 15 percent I always imagine them thinking of someone with a larger salary than mine. Often articles use figures of $50,000 or more and I feel left out.

What can a low-income earner do about her retirement? I am very frugal but still very much enjoy life. However, I worry I'm just not making a high enough salary. Chances are, while I may eventually earn $40,000 a year, I will never make a large income. What do you suggest?

---L.C., by e-mail

A. This is complicated so take it one step at a time. The lower your income, the larger the role Social Security benefits will play in your future. That, in turn, reduces your need to save.

This happens because the Social Security retirement benefits formula provides the greatest amount of benefits for the lowest income. Then it gradually reduces the benefit for additional amounts of income. A $20,000 a year worker can expect Social Security Benefits to replace nearly 50 percent of pre-retirement earnings. A worker who earns near the top of the wage base scale ($84,600 this year) can only expect a 25 percent "replacement rate."

For the 7 percent of earners who have incomes over the wage base maximum, high personal savings are very important. Why? Because Social Security plays a smaller and smaller role as your income increases. A doctor in general practice, for instance, may earn $170,000. That's twice the Social Security wage base maximum. As a result, Social Security will only replace about 12 percent of her income at retirement.

You'll feel left out when you read articles in most of the personal finance magazines because they are looking for high-income readers so they can attract advertisements from the financial services industry. That's the way it is.

So let's go back to square one.

Since you pay employment taxes of 7.6 percent, can expect Social Security to replace about 35 percent of your earned income, and will have lower income taxes when you retire, about half of your needs are covered by Social Security. Personal savings will have to provide the remainder of your replacement income.

How much do you need to save to do that? Not 15 percent.

Basically, you will need about 20 times the amount of income you wish to replace when you retire. You'll need less if you own a home free and clear.

Starting at age 38, saving 12 percent of your income and earning a long-term return of 9 percent will produce the sum you need by age 63 to age 65. Raise the return to 11 percent--- the long-term return on large common stocks--- and your savings requirement is reduced to 8 percent. If your employer provides a match, your out of pocket contribution can be smaller. If you already have some savings or were younger, the amount you'd need to save would be significantly lower.

Finally, a new savings incentive for taxpayers with incomes under $50,000 provides an income tax credit for your savings up to--- but no greater than--- the amount you pay in federal income taxes. This little goody, buried in the Economic Growth and Tax Relief Reconciliation Act of 2001, provides a non-refundable tax credit that is a percentage of taxpayer contributions to qualified retirement plans.

Unfortunately for you, the credit is totally phased out when your modified adjusted gross income exceeds $25,000 if you file as a single taxpayer. It is phased out at $37,500 for heads of household and $50,000 for joint returns. You can get an idea of the size of the credit by examining the table below.
The Tax Credit for Retirement Plan Contributions
Joint Return Head of Household All Other Filers Tax Credit
$0-$30,000 $0-$22,500 $0-$15,000 50% of contribution
$30,001-$32,500 $22,501-$24,375 $15,001-$16,250 20% of contribution
$32,501-$50,000 $24,376-$37,500 $16,251-$25,000 10% of contribution
Over $50,000 Over $37,500 Over $25,000 No credit
Source: 2002 U.S. Master Tax Guide, Commerce Clearing House