Saving a % of income vs saving a $ amount?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Workaholic
Posts: 687
Joined: Thu Jul 18, 2013 6:55 am

Saving a % of income vs saving a $ amount?

Post by Workaholic »

Everyone on this site seems to talk about saving a percentage of their income and this number is seemingly "fixed" (i.e. "pay myself first"). While percentages vary between Bogleheads, it seems that between 25-30% is the range of what most fall into from my reading. As a young Boglehead (currently 23), I currently have no "percentage" but merely max out all tax-advantaged vehicles (401K+4% match plus ROTH IRA) and THEN contribute any leftover amount (after bills) to a taxable account or paying off a 3.6% interest student loan (currently at $16K).

Would it be better to have a fixed percentage of income that I dedicate toward my investment goals or is it better to simply maxing out tax-advantaged accounts no matter what percentage of income this falls into?

I guess a better way to phrase my question is "Is it necessary to have a dedicated percentage of income that you invest or is it alright to simply max out tax-advantaged accounts and then decide what to do with the money leftover?"

I currently make around $56K/ year +/- with the expectation that I'll be making about $62K by next January.
BuckyBadger
Posts: 1221
Joined: Tue Nov 01, 2011 11:28 am

Re: Saving a % of income vs saving a $ amount?

Post by BuckyBadger »

This is a very good thread:

http://www.bogleheads.org/forum/viewtop ... 0&t=135136

that demonstrates a variety of ways to decide how much to save. It really doesn't matter if you consider it a % or a set $ amount. Just make sure you know why you're doing what you're doing - and that it gives you as good a chance as possible to meet your goals.

I personally came up with a number that makes me comfortable that we'll meet our goals, and I increase that number every year by 3%. That works for me but might not work for you.

There is no correct answer to your question, unfortunately.
User avatar
ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Saving a % of income vs saving a $ amount?

Post by ruralavalon »

Workaholic wrote:I currently have no "percentage" but merely max out all tax-advantaged vehicles (401K+4% match plus ROTH IRA) and THEN contribute any leftover amount (after bills) to a taxable account or paying off a 3.6% interest student loan (currently at $16K).
That seems to me to be a sensible procedure :) .

You are paying yourself first, and directing about half of your income toward saving and investing. Thats an extraordinary savings rate.

You are doing fine, stop worrying.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
Meg77
Posts: 2835
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX

Re: Saving a % of income vs saving a $ amount?

Post by Meg77 »

I've thought about this a bit as my income rose in the last few years. It used to be that maxing out retirement accounts was a huge percentage of my income, but now it's more like a reasonable percentage of my income. The amount I've been saving for retirement has remained fixed ($17.5K in my 401k and $5.5K in a Roth IRA), but the percentage saved has now dropped. So I can understand how that might make you feel like you are losing ground when really you just aren't struggling to save quite as hard anymore. The reality is that saving $23K a year should be sufficient for me to reach my goals given that I started saving young and don't anticipate needing a huge income in retirement to live off. I think it's important to get the maximum into tax sheltered accounts that I can every year, but beyond that I am not contributing additional investments to taxable accounts just for the sake of keeping my savings rate at x% (I use it for debt repayment and building a bigger EF - and I've upped my spending too).

I think it's smart to have a minimum percentage of income you will save annually for retirement (say, 15%, assuming you start investing in your 20s) to make sure you are staying on track if you're too young to have a set goal in mind (i.e. I want my portfolio to generate $X of annual income by the time I turn 65). But in reality it doesn't matter WHAT percentage of your income you save as long as you are on track to meet your goals. How big that goal is, how big your income is, whether you started early or late, and market returns will all impact what those numbers/percentages need to be.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Kielke
Posts: 63
Joined: Sat Jun 22, 2013 9:34 am

Re: Saving a % of income vs saving a $ amount?

Post by Kielke »

They both have their benefits and draw backs. Mostly if you have a fixed numerical goal, you can calculate the fixed amount each year that should be saved to reach that goal, this may or may not be feasible given the circumstances involved. While percentages for things like retirement are incredibly useful for two reasons. One, it is a lifestyle thing, get used to spending less than you earn, on this forum I don't think I need to explain why that is so important. Secondly, Through different methods of math, for certain percentage amounts (typically the 15% or so quoted), if done most of your adult life will give you a nest egg that you should be able to live off of with no major lifestyle shock. That second one is true whether you live on minimum wage, or you are a CEO of a major company.


It really does sound like you are doing great though. For most people being able to save enough to max out 401k and IRA would easily exceed most quoted percentages (not talking boglehead percentages though, those people are weird :wink: ).
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: Saving a % of income vs saving a $ amount?

Post by placeholder »

Workaholic wrote:I currently have no "percentage" but merely max out all tax-advantaged vehicles (401K+4% match plus ROTH IRA) and THEN contribute any leftover amount (after bills) to a taxable account or paying off a 3.6% interest student loan (currently at $16K).
Seems sensible as it's what I do (except for the loan payoff part).
scone
Posts: 1457
Joined: Wed Jul 11, 2012 4:46 pm

Re: Saving a % of income vs saving a $ amount?

Post by scone »

We did it by having a portion of our pay checks directed to savings before we ever saw them, so we didn't have to make any deliberate effort to save. As the paychecks increased, the savings increased, but our spending stayed about the same. If you save most of your salary increases and bonuses over 30 years, it mounts up pretty well even if you aren't a brilliant investor. And since we never did spend a lot before retirement, I don't think we'll feel terribly deprived during retirement.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 8:40 am

Re: Saving a % of income vs saving a $ amount?

Post by staythecourse »

It is like asking Coke or Pepsi. Both are good and if your dry either is better then none.

You are doing great just do the same for the next 30+ yrs. and you will be fine.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
kaudrey
Posts: 1143
Joined: Fri Nov 22, 2013 1:40 pm

Re: Saving a % of income vs saving a $ amount?

Post by kaudrey »

Workaholic - I think, also, the fact that we say we are saying we save a certain percentage of our income is so that we aren't getting too specific about our own finances, but still trying to help answer people's questions.

On this forum, I may say that we save 30% our incomes, instead of saying we save, for example, $30K a year. The percentage is more helpful than the dollar amount for people trying to figure out what to save regardless of what stage in life they are. If you use a percentage, then the amount you are saving increases every year as you get raises. What could you get from the dollar information, without knowing anything about our lifestyle and what we earn and what we plan to spend in retirement etc.? Me saying I save $30K a year doesn't help you when you are earning $56K and just starting out, because obviously I wasn't doing that in my mid-20s. But in my mid-20s, I WAS saving 30% of my income, something that has been, fairly consistent over the last 30 years (exceptions happen, of course, but probably only in 4 or 5 of those 20 years).

Of course, either one doesn't help much if you don't know further context. When I was your age, I did what you are doing - maxed out tax-deferred accounts, and if I had anything left, put it in taxable. It is awesome that you are doing that. I can say that if you keep that up, and continue to increase the "extra" you are saving as you get raises, you will be well on your way to having a large nest egg. I am 45 now, and can attest to that!

Best of luck to you.
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Saving a % of income vs saving a $ amount?

Post by Twins Fan »

[Response to post no longer in this thread removed by admin LadyGeek]

OP, I also agree that you are doing great for your age! I think the percentage to save is used as a guideline when people talk about that. Let's say 20%, that is just easier to say than a fixed number of $$ because 20% will be a different number for everyone. I don't figure my savings rate down to a percentage. I save/contribute what is comfortable to me, and whatever percentage of income it ends up is what it is.

I think many in Bogleheads would say to save as much as you can and blow the recommended percentages out of the water, if possible. So, keep doing what you're doing.
Longtimelurker
Posts: 471
Joined: Fri Dec 13, 2013 7:23 am

Re: Saving a % of income vs saving a $ amount?

Post by Longtimelurker »

[Response to post no longer in this thread removed by admin LadyGeek]
I agree. Lets simply answer the questions that were asked and not expand in any way the scope of the question. This way, the right answer can be confined to the scope of interest of the uninformed OP. I think you have it right! This is clearly the best way to educate.

By the way. The OP's question was predicated on an INCORRECT ASSUMPTION. So your answers, while right for the question the OP asked, is likely not correct when reality is applied to the flawed assumption.
Workaholic wrote: I currently have no "percentage" but merely max out all tax-advantaged vehicles (401K+4% match plus ROTH IRA) and THEN contribute any leftover amount (after bills) to a taxable account or paying off a 3.6% interest student loan (currently at $16K).
Last edited by Longtimelurker on Wed Mar 26, 2014 10:41 am, edited 3 times in total.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
User avatar
englishgirl
Posts: 2508
Joined: Thu Mar 01, 2007 4:34 pm
Location: FL

Re: Saving a % of income vs saving a $ amount?

Post by englishgirl »

Yeah, you are doing great, OP!!

My income is variable, and is made up of a W2 job and a 1099 job. So what I do is make sure I max my Roth IRA first. That's a dollar amount. Then out of my W2 paycheck (the only place I have a 401k), I put away 10% of that income. I'm sure many people would say it should be more, but that's what I can afford right now. And then I max my HSA, which is again a dollar amount. I have now also started putting a small dollar amount every month into I bonds.

At the end of the year, I've put away between 15 and 20% of my income to retirement savings. So if we have a poll asking about percentages, that's what I'll say. But only one of my accounts is funded on a percentage basis.

I'd love to be able to save 150%. That'd be a neat trick! :P
Sarah
BuckyBadger
Posts: 1221
Joined: Tue Nov 01, 2011 11:28 am

Re: Saving a % of income vs saving a $ amount?

Post by BuckyBadger »

You told him he should have access to these things. I contend that he should NOT necessarily have access all those things.

Perhaps it would have been wise to have worded your first post differently, since I was not the only person to get the same impression.

Also, calling him "young man" is quite condescending. In my opinion, of course.
User avatar
Peter Foley
Posts: 5533
Joined: Fri Nov 23, 2007 9:34 am
Location: Lake Wobegon

Re: Saving a % of income vs saving a $ amount?

Post by Peter Foley »

For younger individuals just starting out, eliminating debt, having an emergency fund, working to maximize contributions to deferred accounts, and funding a Roth are reasonable goals. Saving for a house (if reasonable in a particular geographic area) and savings for children's education, while not retirement savings goals, are also sound economic practices. Many of these goals can be pursued simultaneously although I personally would defer the saving for education until much progress had been made on the others.

With multiple goals in mind, I would suggest a dollar amount rather than a percentage.
rbrown599
Posts: 52
Joined: Thu Sep 19, 2013 9:56 am

Re: Saving a % of income vs saving a $ amount?

Post by rbrown599 »

I just recently turned 24, make $55k/yr + gainshare, and max out both my Roth and 401k contributions. For me, this is just enough savings without making me feel like I am financially constrained.

Aside: Sure, it would be nice to live like my friends do: 5% into the 401k because Dad said so and then spend the rest on whatever you'd like. Of course, I'm financially stable, I bought and paid off my car in 1.5 years, I will close on my first house on May 16th (if everything goes smoothly), and I have 6 months of living expenses saved. I graduated college with $0 to my name and around $10,000 in debt, and I am now just shy of hitting a six figure net worth while being completely debt free.

tl;dr

Thanks, Bogleheads, for helping me become financially savvy.
Novine
Posts: 1240
Joined: Mon Nov 17, 2008 8:07 pm

Re: Saving a % of income vs saving a $ amount?

Post by Novine »

Workaholic - For someone your age, you're off to a great start. As you've seen, there aren't really any hard and fast rules in this area. For people your age, my advice would be to save at least a minimum of 10% of your gross income for retirement. As you get older, the percentage of your income saved for retirement should increase. In your case, it sounds like you're in a position to do more than the minimum. As long as your finances permit it, I would strongly encourage you to do more than the minimum. The best thing you have going for you is time and the more money you can put away for retirement now, the better for you long-term. This does have to be balanced against other competing financial interests like paying off debt (many your age are paying down much more in student loans than you have), saving for a home, starting a family, etc. I found the Charles Farrell book "Your Money Ratios: 8 Simple Tools for Financial Security at Every Stage of Life" to be a good discussion on this topic. He does have rules about how much you should be saving and why but does so in a way that reflects the realities of the different stages of our lives. As always, it's best to understand where these rules come from and then adapt them to your particular circumstances. Good fortunes going forward and keep up the good work!
John3754
Posts: 1289
Joined: Tue Mar 19, 2013 8:56 pm

Re: Saving a % of income vs saving a $ amount?

Post by John3754 »

I don't have a fixed number or a percentage for my savings, I have a budgeted fixed number for my spending, everything else goes into savings.

"Pay yourself first" is a good slogan for people who have difficulty in saving/reining in their spending, but for the frugal/Boglehead type the mentality should be "minimize spending, save the rest".
Topic Author
Workaholic
Posts: 687
Joined: Thu Jul 18, 2013 6:55 am

Re: Saving a % of income vs saving a $ amount?

Post by Workaholic »

The last time I checked this thread yesterday evening, I believe it had about 7 posts in it and was fizzling out...obviously my "assumption" was quite wrong :D .

It's fairly hard to quote everyone who responded but I'll try to answer all points that were raised.

First of all, thank you to everyone who said I have a great savings rate. While I could do better, I chose to enjoy some of my hard-earned money at the present versus delaying gratification for the future. Hopefully my student loan will be paid off by early January next year which will allow me to allocate that $420-ish/ month toward a taxable account. I also have a new car I purchased with 0% financing for 60 months (and I LOVE the car) which is $440/ month. Obviously all of us are Bogleheads on this forum but the more I read, the more I seem to realize that everyone here has certain "Un-Bogleish" tendencies ranging from luxury vacations to nice cars to vacation homes so I guess I feel no shame.

I guess the REASON I asked my question was because while percentages of one's income can be useful to others who are planning for retirement, it's also not a "hard and fast rule". I plan on retiring at age 50-52 and am trying to guesstimate how much money I'll need to sock away in order to achieve my goal. Right now that amount is at $28K/ year-ish (taxable investing can vary -17.5K pre tax, $5500 ROTH plus $5000 taxable). At age 50-52, I'd like to exit the rat race and retire TO a life of travel- my true passion. I figure this could cost anywhere from $50K-$80K/ year at least in the first 10-20 years of retirement until (God willing) I get into my 70's when I'll likely slow down. While this may seem like a lofty goal...I feel it IS something that can be achieved with proper planning and execution. I also stand to inherit farmland that currently throws off $45K/ year in income (real value appx. $1.4M give or take) plus other investments from my parents later in life of course (only child, no siblings). If I'm able to accumulate $3M over a 30 year time span, would this be sufficient to fund the type of lifestyle I seek in my early retirement?

Now to answer some points....

Yes I realize there are more "tax-advantaged accounts" than just a 401K and IRA/ROTH but these are either not applicable (no option for after-tax 401K) or have no use for me at this stage (529 plan). I know about EE bonds but I'm not currently interested in buying bonds at my stage in life. As far as an HSA, yes I have the option but I see no realized benefit of one because I have health coverage that my employer subsidizes and is a very low $500 deductible plan with excellent benefits.

I'm not necessarily saving for a home at this point BUT the money in my taxable accounts will be used for that purpose if I ever decide to purchase one. I'm on the fence about whether I really want all the associated costs of owning a home versus paying rent ($400 month split between gf and I) on a nice two bedroom apt. I've looked at houses but if I were to take the plunge...I'd be looking at appx. $225K-$250K for what I'd want (newer, 2000ish sq ft, 1/4 acre lot).

I do have a question that this forum may be able to answer. I started with my employer the summer of 2013, prior to 2012 they offer a DB Pension plan which was NOT COLA-adjusted. The basics were you received $40 for each year of service to the company with a minimum of 5 years to be vested in the plan. So if I would've started in 2012 and worked there for 30 years, my pension would start paying out at age 65 at $1200 month in 2042 dollars. Because they did away with this plan, my company now gives 2013+ hired employees an additional 1% match in their 401K (3% for 2012 and before, 4% for 2013+ hires). Over the course of time, would this extra 1% match the DB plan or even exceed it? I'm not sure how one would figure the value of this extra match over a DB plan.
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Saving a % of income vs saving a $ amount?

Post by Twins Fan »

We got a little side tracked there. :D

I don't think you can or should compare the old DB pension to the extra 1% match. The old plan was a set or fixed system. The extra 1% match has many variables, like how the 401k is allocated, risk reward, pay scale/raises, market returns, and so on. I'm sure there's some formula to get the likely outcome. But, I would simply look at it as the old system was known and the new system is unknown.
Novine
Posts: 1240
Joined: Mon Nov 17, 2008 8:07 pm

Re: Saving a % of income vs saving a $ amount?

Post by Novine »

"As far as an HSA, yes I have the option but I see no realized benefit of one because I have health coverage that my employer subsidizes and is a very low $500 deductible plan with excellent benefits."

Some people use their HSA as a secondary IRA. The contribution goes in tax free and can be invested along side your retirement portfolio. If you need to cover medical expenses, you can pull those out tax free.
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Saving a % of income vs saving a $ amount?

Post by Dandy »

Maxing out in dollars is a good thing. As your income rises you probably want to focus more on what percent you are saving. Your pre retirement standard of living kind of sets the bar as to what you might need in retirement. So, when you are making $100,000 a year you wouldn't want to just fund your Roth with $5,500 a year. You would probably want to save a double digit percentage. You don't want your standard of living to drop dramatically when you retire.

I gradually increased the percentage of savings as my income grew and probably topped out in the mid teens. The more you front end the savings the better/easier.
rbrown599
Posts: 52
Joined: Thu Sep 19, 2013 9:56 am

Re: Saving a % of income vs saving a $ amount?

Post by rbrown599 »

Workaholic wrote: I guess the REASON I asked my question was because while percentages of one's income can be useful to others who are planning for retirement, it's also not a "hard and fast rule". I plan on retiring at age 50-52 and am trying to guesstimate how much money I'll need to sock away in order to achieve my goal. Right now that amount is at $28K/ year-ish (taxable investing can vary -17.5K pre tax, $5500 ROTH plus $5000 taxable). At age 50-52, I'd like to exit the rat race and retire TO a life of travel- my true passion. I figure this could cost anywhere from $50K-$80K/ year at least in the first 10-20 years of retirement until (God willing) I get into my 70's when I'll likely slow down. While this may seem like a lofty goal...I feel it IS something that can be achieved with proper planning and execution. I also stand to inherit farmland that currently throws off $45K/ year in income (real value appx. $1.4M give or take) plus other investments from my parents later in life of course (only child, no siblings). If I'm able to accumulate $3M over a 30 year time span, would this be sufficient to fund the type of lifestyle I seek in my early retirement?
I think the best thing to do here would be to play with some retirement calculators and figure out the monthly savings requirement, compounded at a given interest rate, to reach your goal. Then compare that monthly requirement to a livable net income requirement. Work backwards, in a sense. For example (and I'm just throwing out numbers here so do not take them as 100% accurate), you might find that a model of maintaining a very aggressive AA for 30 years, returning an average 8%, would require monthly savings of $4,500 to reach a portfolio size of $3MM by year 30. If you maintain a monthly savings rate of somewhere around 30%, this means you would need a net monthly income of $15,000. So that's what...a $200k/yr salary, give or take?

Disclaimer: Again, the above scenario is a fictional estimate and should not be taken as mathematically accurate.
b4nash
Posts: 190
Joined: Wed Apr 11, 2012 11:20 am

Re: Saving a % of income vs saving a $ amount?

Post by b4nash »

I challenge myself to save as much as the marginal tax bracket I am in.
User avatar
LadyGeek
Site Admin
Posts: 95691
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Saving a % of income vs saving a $ amount?

Post by LadyGeek »

I removed a suggestion which was interpreted as an uncivil comment and proceeded to derail the thread. Some continuity was lost. As a reminder, see: Forum Policy
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Post Reply