Putting Savings in Perspective

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BrandonBogle
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Putting Savings in Perspective

Post by BrandonBogle » Sat Mar 11, 2017 12:44 am

Fellow Bogleheads, first off I know that planning in retirement is to reasonably estimate you expenses and save to (hopefully safely) meet them. I have a figure in my head for that based on today's expenses and adjustments from there.

That said, I know much has been written about rules of thumb for savings pre-retirement and reasonably estimating expenses in retirement, such as 80% of current income (generally undefined in such rules of thumb and a source of much contention). So I took my 2016 tax return and made a judgement call that (a) I'm comfortable and not struggling, and (b) my quality of life has suffered from excessive saving and I should loosen up the pursestrings without concern that I'm putting FIRE at risk. This thread has played a role in this thinking: Possibly Financially Independent and Feeling Miserable

So from my 2016 numbers, I took my did the following calculation:
Gross earnings from W2 (my sole earned income source)
- 401k Employee Contributions
- Health, Dental, Vision Insurance Deductions
- FSA Contributions
- Medicare Taxes
- Social Security Taxes
- Federal Tax Liability from 1040
- NC Tax Liability from D-400 (standard tax form)
= Take-home earnings

Take-home earnings / Gross earnings = 56%

Take-home earnings / Gross earnings = 56%

56%

Wow. That number is actually a little under my desired retirement income in today's dollars and thus, significantly above my baseline for living a quiet life with a roof over my head, food on the table, and a car in the driveway.

56%!!!

From that, I have a mortgage, a car loan, and a small surplus ($750/mo) towards big ticket items like home renovations at some point. Given my desire for FIRE (initially at 52, but maybe accelerated into the upper 40s), I am much further on track than I would have though. Using my own projections in real terms and 2.5% growth rate for 2017 and beyond, I would be at a 4.3% withdrawal rate at 52 and 3.2% once social security kicks in at 67 (though I would likely delay). I am calculating the withdrawal rates by simply diving my withdrawal $ by the projected balance when I turn 52 (correct me if that is improper please).

I know that since I'm in my lower 30s much can change by the time I retire, especially the potential of having kids, but really caught me off guard how little of my gross I am actually spending. It truly caught me off guard.

To make this thread actionable, I have a few questions.
- 1. What is your percentage for take-home or expenses vs. gross
- 2. Do you count taxable dividends in this? I did not as they get reinvested vs. spent in my case.
- 3. Any big flaws in this line of thinking?
- 4. Any sage advice for someone who grew up in a home that filed for bankruptcy and was on food stamps as a child and still doesn't innately think of himself as middle class?

I look forward to hearing any life story details you all care to share. Thanks!


P.S. - Special thanks to many of you here. I have read many of your threads, but interacted with only so few of you. @pkcrafter and @damjam were particularly special contacts early on in my "career" as a Boglehead in guiding my investment life. Meeting many of you at Bogleheads 2014 was a Real Big Deal™ for me and I hope to repeat it in 2017!

mhalley
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Re: Putting Savings in Perspective

Post by mhalley » Sat Mar 11, 2017 1:06 am

You might review mmm post on savings rate and early retirement.

http://www.mrmoneymustache.com/2012/01/ ... etirement/

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FiveK
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Re: Putting Savings in Perspective

Post by FiveK » Sat Mar 11, 2017 2:43 pm

BrandonBogle wrote:To make this thread actionable, I have a few questions.
- 1. What is your percentage for take-home or expenses vs. gross
- 2. Do you count taxable dividends in this? I did not as they get reinvested vs. spent in my case.
- 3. Any big flaws in this line of thinking?
- 4. Any sage advice for someone who grew up in a home that filed for bankruptcy and was on food stamps as a child and still doesn't innately think of himself as middle class?
Rather than worry about those percentages (e.g., because that causes exactly the type of "do you count...?" question you have), simply deal with straight numbers - just as you are doing in your projections.

Doing everything in "real" terms (~assuming inflation = 0%) also simplifies things in a defensible way.

This far away, the ballpark estimate of (total spending needs, including taxes) * 25 = (desired amount of invested assets) for your retirement target is reasonable.

KlangFool
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 2:54 pm

OP,

I have no idea what you are doing in overcomplicating a simple item.

A) What is your current annual expense?

B) Take your gross income minus the tax and the savings, you will get your annual expense. The mortgage is not saving.

C) At whatever age that you choose to retire, is your investment asset at least X times your annual expense? If the answer is yes, you reach your goal. If not, you are not. You pick whatever that X is.

KlangFool

aristotelian
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Re: Putting Savings in Perspective

Post by aristotelian » Sat Mar 11, 2017 3:04 pm

...Or calculate your savings rate. It is pretty simple to know how much you are putting in your 401k, IRA's, and taxable. Your spending rate is 100 minus your savings rate.

We are saving around 20%. I would like to be a little higher to get ahead of the game, but my wife works part time and is finishing a masters degree so it is tough to do better than that with two kids and the expenses that go with parenting.

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BrandonBogle
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Re: Putting Savings in Perspective

Post by BrandonBogle » Sat Mar 11, 2017 5:36 pm

mhalley wrote:You might review mmm post on savings rate and early retirement.

http://www.mrmoneymustache.com/2012/01/ ... etirement/


Thanks! While I heard of MMM, I hadn't ever read his stuff. That post and a few others were good stories to read and I'm glad that I naturally gravitated towards similar actions.

FiveK wrote:Rather than worry about those percentages (e.g., because that causes exactly the type of "do you count...?" question you have), simply deal with straight numbers - just as you are doing in your projections.

Doing everything in "real" terms (~assuming inflation = 0%) also simplifies things in a defensible way.

This far away, the ballpark estimate of (total spending needs, including taxes) * 25 = (desired amount of invested assets) for your retirement target is reasonable.


Yeah. My spreadsheets are based on dollars out and calculating growth/shrinkage until age 95, assuming 2.5% inflation from now until then (I have it broken down by year and update it once each year's CPI is available). Total spending needs w/o consideration to SSA and any pensions * 25 is how I've planed for it all along thankfully. :)

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BrandonBogle
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Re: Putting Savings in Perspective

Post by BrandonBogle » Sat Mar 11, 2017 5:45 pm

KlangFool wrote:OP,

I have no idea what you are doing in overcomplicating a simple item.

A) What is your current annual expense?

B) Take your gross income minus the tax and the savings, you will get your annual expense. The mortgage is not saving.

C) At whatever age that you choose to retire, is your investment asset at least X times your annual expense? If the answer is yes, you reach your goal. If not, you are not. You pick whatever that X is.

KlangFool


KlangFool, you've made me confused now :?

I started with (a), but had never done the (b) exercise before. That's why it caught me off guard to see how that worked out. Where do you feel that I think the mortgage is saving? I'm trying to figure out if I need to restate something.

Basically, I was shocked to see how little of my gross I was living on and how my calculation for (a) in retirement even includes mortgage payments and car loans, which could be taken care of before retirement.

aristotelian wrote:...Or calculate your savings rate. It is pretty simple to know how much you are putting in your 401k, IRA's, and taxable. Your spending rate is 100 minus your savings rate.


Why would you not subtract taxes you are paying before retirement? I had previously done the savings rate percentage using gross (401k + ira + taxable / gross) and would get a number that essentially is way understated. Substituting gross with expenses, I got from saving 30% to saving 53% and easy to justify letting some lifestyle creep occur.

KlangFool
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 6:04 pm

BrandonBogle wrote:
KlangFool wrote:OP,

I have no idea what you are doing in overcomplicating a simple item.

A) What is your current annual expense?

B) Take your gross income minus the tax and the savings, you will get your annual expense. The mortgage is not saving.

C) At whatever age that you choose to retire, is your investment asset at least X times your annual expense? If the answer is yes, you reach your goal. If not, you are not. You pick whatever that X is.

KlangFool


KlangFool, you've made me confused now :?

I started with (a), but had never done the (b) exercise before. That's why it caught me off guard to see how that worked out. Where do you feel that I think the mortgage is saving? I'm trying to figure out if I need to restate something.

Basically, I was shocked to see how little of my gross I was living on and how my calculation for (a) in retirement even includes mortgage payments and car loans, which could be taken care of before retirement.

aristotelian wrote:...Or calculate your savings rate. It is pretty simple to know how much you are putting in your 401k, IRA's, and taxable. Your spending rate is 100 minus your savings rate.


Why would you not subtract taxes you are paying before retirement? I had previously done the savings rate percentage using gross (401k + ira + taxable / gross) and would get a number that essentially is way understated. Substituting gross with expenses, I got from saving 30% to saving 53% and easy to justify letting some lifestyle creep occur.


BrandonBogle,

<<Where do you feel that I think the mortgage is saving?>>

Many people do that. So, I am just stating that in my system, that is not saving.

<< Basically, I was shocked to see how little of my gross I was living on and how my calculation for (a) in retirement even includes mortgage payments and car loans, which could be taken care of before retirement.>>

So, are you saying that you will reach 33X your current annual expense by 52 or earlier?

<< Substituting gross with expenses, I got from saving 30% to saving 53% and easy to justify letting some lifestyle creep occur.>>

Changing the percentage does not change the actual amount that you are saving. And, whether you will reach your number by a certain age. So, why you justify your lifestyle creep by this?

It is very simple.

What is your number? Can you reach your number by the targeted age?

KlangFool

KlangFool
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 6:07 pm

OP,

I save 1 year of annual expense every year. I can reach my goal in about 25 years even with 0% real return. It is that simple. No spreadsheet or complicated assumption is needed.

KlangFool

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Phineas J. Whoopee
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Re: Putting Savings in Perspective

Post by Phineas J. Whoopee » Sat Mar 11, 2017 6:56 pm

KlangFool wrote:...
BrandonBogle wrote:Where do you feel that I think the mortgage is saving?

Many people do that. So, I am just stating that in my system, that is not saving.
...

It's difficult, KlangFool, to reconstruct proper xml attributions when you don't use them yourself. Are you writing for you or for your readers?

Paying principal on a mortgage increases one's net worth, but not liquidity. Depositing part of one's paycheck into a savings account increases one's net worth, and liquidity.

If you prefer to use your own idiosyncratic definition of saving to mean increasing liquidity out of cash flow rather than increasing net worth out of cash flow that's fine, but it would be easier, along with attributions, if you said in your posts what you mean by it so others don't have to deduce it.

KlangFool wrote:I save 1 year of annual expense every year. I can reach my goal in about 25 years even with 0% real return. It is that simple. No spreadsheet or complicated assumption is needed.

Congratulations. May everyone do as you do so simply for a quarter century without interruption through sheer force of will despite varying personal circumstances.

PJW

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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 7:12 pm

Phineas J. Whoopee wrote:
KlangFool wrote:I save 1 year of annual expense every year. I can reach my goal in about 25 years even with 0% real return. It is that simple. No spreadsheet or complicated assumption is needed.

Congratulations. May everyone do as you do so simply for a quarter century without interruption through sheer force of will despite varying personal circumstances.

PJW


PJW,

I came from a culture/country where the average gross saving rate for the whole country is 30+%. So, it is normal and common for people in that culture/country. I cannot claim the credit. This is just how I was raised.

KlangFool

delamer
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Re: Putting Savings in Perspective

Post by delamer » Sat Mar 11, 2017 7:28 pm

One flaw in your thinking (#3) is that 56% does not include the medical premiums you are having taken out of your paycheck. And the portion of the premiums you are paying is probably just a fraction of the real cost because your employer is covering the rest. All those costs will be have to be dealt with in a early retirement budget. Cost and availability of health insurance is a huge issue for pre-Medicare retirees. Even under the current law, it can be tough to find good, affordable coverage. And the future is uncertain.

Not taking away from your current frugality at all, but medical costs cannot be ignored in your planning which means your take-home percentage is misleading.

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Re: Putting Savings in Perspective

Post by Phineas J. Whoopee » Sat Mar 11, 2017 7:36 pm

KlangFool wrote:...
PJW,

I came from a culture/country where the average gross saving rate for the whole country is 30+%. So, it is normal and common for people in that culture/country. I cannot claim the credit. This is just how I was raised.

KlangFool

What's the median? Are there no subsistence households? Are there none below subsistence, even homeless? Are there no prisoners? There are in my native culture/country.
PJW

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triceratop
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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 7:44 pm

Phineas J. Whoopee wrote:
KlangFool wrote:...
BrandonBogle wrote:Where do you feel that I think the mortgage is saving?

Many people do that. So, I am just stating that in my system, that is not saving.
...

It's difficult, KlangFool, to reconstruct proper xml attributions when you don't use them yourself. Are you writing for you or for your readers?

Paying principal on a mortgage increases one's net worth, but not liquidity. Depositing part of one's paycheck into a savings account increases one's net worth, and liquidity.

If you prefer to use your own idiosyncratic definition of saving to mean increasing liquidity out of cash flow rather than increasing net worth out of cash flow that's fine, but it would be easier, along with attributions, if you said in your posts what you mean by it so others don't have to deduce it.



This is a very good point, and written very similarly to how I would have done so (thank you for saving me the time, PJW). Another way of stating the point: if you know you will retire only after paying your mortgage it makes no sense to count mortgage expense (paying interest or adding to equity) as an expense for which one must match retirement assets to. That is not to say that you should count your house value as a retirement asset, but simply you should not be penalizing your needed future cash flow by current cash flow that pays for a future liability (housing). It just doesn't make sense.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

KlangFool
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 7:52 pm

Phineas J. Whoopee wrote:
KlangFool wrote:...
PJW,

I came from a culture/country where the average gross saving rate for the whole country is 30+%. So, it is normal and common for people in that culture/country. I cannot claim the credit. This is just how I was raised.

KlangFool

What's the median? Are there no subsistence households? Are there none below subsistence, even homeless? Are there no prisoners? There are in my native culture/country.
PJW


PJW,

http://www.investopedia.com/articles/pe ... e-most.asp

<< What's the median? Are there no subsistence households? Are there none below subsistence, even homeless? Are there no prisoners? There are in my native culture/country.>>

Yes, all those existed but it does not stop most people to save.

KlangFool

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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 7:58 pm

triceratop wrote:
Phineas J. Whoopee wrote:
KlangFool wrote:...
BrandonBogle wrote:Where do you feel that I think the mortgage is saving?

Many people do that. So, I am just stating that in my system, that is not saving.
...

It's difficult, KlangFool, to reconstruct proper xml attributions when you don't use them yourself. Are you writing for you or for your readers?

Paying principal on a mortgage increases one's net worth, but not liquidity. Depositing part of one's paycheck into a savings account increases one's net worth, and liquidity.

If you prefer to use your own idiosyncratic definition of saving to mean increasing liquidity out of cash flow rather than increasing net worth out of cash flow that's fine, but it would be easier, along with attributions, if you said in your posts what you mean by it so others don't have to deduce it.



This is a very good point, and written very similarly to how I would have done so (thank you for saving me the time, PJW). Another way of stating the point: if you know you will retire only after paying your mortgage it makes no sense to count mortgage expense (paying interest or adding to equity) as an expense for which one must match retirement assets to. That is not to say that you should count your house value as a retirement asset, but simply you should not be penalizing your needed future cash flow by current cash flow that pays for a future liability (housing). It just doesn't make sense.


triceratop,

<< if you know you will retire only after paying your mortgage>>

How would you know that? You are assuming that you will not be forced into early retirement involuntary.

I had worked for 30+ years. So far, I only know two persons among all my ex-co-workers worked until the retirement age of 62 or older. I know for certain that I will not be fully employed until 62 years old. This is independent of whether I pay off the mortgage.

KlangFool

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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 8:05 pm

KlangFool wrote:
triceratop wrote:
Phineas J. Whoopee wrote:
KlangFool wrote:...
BrandonBogle wrote:Where do you feel that I think the mortgage is saving?

Many people do that. So, I am just stating that in my system, that is not saving.
...

It's difficult, KlangFool, to reconstruct proper xml attributions when you don't use them yourself. Are you writing for you or for your readers?

Paying principal on a mortgage increases one's net worth, but not liquidity. Depositing part of one's paycheck into a savings account increases one's net worth, and liquidity.

If you prefer to use your own idiosyncratic definition of saving to mean increasing liquidity out of cash flow rather than increasing net worth out of cash flow that's fine, but it would be easier, along with attributions, if you said in your posts what you mean by it so others don't have to deduce it.



This is a very good point, and written very similarly to how I would have done so (thank you for saving me the time, PJW). Another way of stating the point: if you know you will retire only after paying your mortgage it makes no sense to count mortgage expense (paying interest or adding to equity) as an expense for which one must match retirement assets to. That is not to say that you should count your house value as a retirement asset, but simply you should not be penalizing your needed future cash flow by current cash flow that pays for a future liability (housing). It just doesn't make sense.


triceratop,

<< if you know you will retire only after paying your mortgage>>

How would you know that? You are assuming that you will not be forced into early retirement involuntary.

I had worked for 30+ years. So far, I only know two persons among all my ex-co-workers worked until the retirement age of 62 or older. I know for certain that I will not be fully employed until 62 years old. This is independent of whether I pay off the mortgage.

KlangFool


KlangFool,

I'm not sure I follow. The OP's question relates to the choice of whether to voluntarily retire early, and whether current savings are sufficient to meet future obligations. Whether one will be paying the mortgage in voluntary early retirement is directly relevant to the OP's question: if one is not, then it should not be counted as an expense needed to be met by future assets.

Your observation that some workers are involuntarily phased out of full employment prior to FRA seems irrelevant to the OP's question of when to voluntarily retire. I appreciate you have good reasons for your choices and I think your planning is prudent but they do not appear relevant to the OP's problem.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 8:14 pm

triceratop wrote:KlangFool,

I'm not sure I follow. The OP's question relates to the choice of whether to voluntarily retire early, and whether current savings are sufficient to meet future obligations. Whether one will be paying the mortgage in voluntary early retirement is directly relevant to the OP's question: if one is not, then it should not be counted as an expense needed to be met by future assets.

Your observation that some workers are involuntarily phased out of full employment prior to FRA seems irrelevant to the OP's question of when to voluntarily retire. I appreciate you have good reasons for your choices and I think your planning is prudent but they do not appear relevant to the OP's problem.


triceratop,

<< I'm not sure I follow. The OP's question relates to the choice of whether to voluntarily retire early, and whether current savings are sufficient to meet future obligations.>>

1) Do you agree that if the person has enough asset/investment to cover the annual expense including the mortgage, the person could retire?

2) If the answer is yes, then, my number/system works. It might be more conservative than other models but it works as a good estimate.

KlangFool

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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 8:20 pm

KlangFool wrote:
triceratop wrote:KlangFool,

I'm not sure I follow. The OP's question relates to the choice of whether to voluntarily retire early, and whether current savings are sufficient to meet future obligations. Whether one will be paying the mortgage in voluntary early retirement is directly relevant to the OP's question: if one is not, then it should not be counted as an expense needed to be met by future assets.

Your observation that some workers are involuntarily phased out of full employment prior to FRA seems irrelevant to the OP's question of when to voluntarily retire. I appreciate you have good reasons for your choices and I think your planning is prudent but they do not appear relevant to the OP's problem.


triceratop,

<< I'm not sure I follow. The OP's question relates to the choice of whether to voluntarily retire early, and whether current savings are sufficient to meet future obligations.>>

1) Do you agree that if the person has enough asset/investment to cover the annual expense including the mortgage, the person could retire?

2) If the answer is yes, then, my number/system works. It might be more conservative than other models but it works as a good estimate.

KlangFool


1. Yes, obviously.

2. No, your system "works" in that you will only retire after having enough savings. But that's only half of it. A model which only lets you retire after having accumulated 100x expenses also "works" while being more conservative. Keep in mind that we are talking about possibly years of one's life working that may be unnecessary due to your oversimplification. That is, it is not a good estimate at all. In my field we would call it a loose upper bound, which one should tighten to make useful.

edit: yet another way to state the point is that according to your model, the required savings discontinuously drops in the year that one fully pays off the mortgage. That's a sign that the model is nonsensical.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Putting Savings in Perspective

Post by Phineas J. Whoopee » Sat Mar 11, 2017 8:31 pm

KlangFool wrote:
Phineas J. Whoopee wrote:
KlangFool wrote:...
PJW,

I came from a culture/country where the average gross saving rate for the whole country is 30+%. So, it is normal and common for people in that culture/country. I cannot claim the credit. This is just how I was raised.

KlangFool

What's the median? Are there no subsistence households? Are there none below subsistence, even homeless? Are there no prisoners? There are in my native culture/country.
PJW


PJW,

http://www.investopedia.com/articles/pe ... e-most.asp

Phineas J. Whoopee wrote:What's the median? Are there no subsistence households? Are there none below subsistence, even homeless? Are there no prisoners? There are in my native culture/country.


Yes, all those existed but it does not stop most people to save.

KlangFool

It's time consuming, KlangFool, to fix your attribution errors, and it isn't even always clear how to do so. Are you writing for you or for your readers?

Based on your link, I ask again what is the median savings rate, and ask anew what it is if all the people living and working there are included, taking into account the imported manual laborers and not just the citizens? A lucky birth is not an achievement. Mine certainly isn't.

PJW

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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 8:34 pm

triceratop wrote:
1. Yes, obviously.

2. No, your system "works" in that you will only retire after having enough savings. But that's only half of it. A model which only lets you retire after having accumulated 100x expenses also "works" while being more conservative. Keep in mind that we are talking about possibly years of one's life working that may be unnecessary due to your oversimplification. That is, it is not a good estimate at all. In my field we would call it a loose upper bound, which one should tighten to make useful.


triceratop,

<< Keep in mind that we are talking about possibly years of one's life working that may be unnecessary due to your oversimplification. That is, it is not a good estimate at all.>>

How would that be so? I am making an estimate of the annual expense that is easy to calculate. It is up to the person to decide the number by choosing a multiple. Why do you assume that the number has to be 100X? It could be any number

KlangFool

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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 8:42 pm

Phineas J. Whoopee wrote:It's time consuming, KlangFool, to fix your attribution errors, and it isn't even always clear how to do so. Are you writing for you or for your readers?

Based on your link, I ask again what is the median savings rate, and ask anew what it is if all the people living and working there are included, taking into account the imported manual laborers and not just the citizens? A lucky birth is not an achievement. Mine certainly isn't.

PJW


PJW,

<<A lucky birth is not an achievement. Mine certainly isn't.>>

Among my family and my community, rich and poor, it is part of our culture to save 30+% or more our gross income. It is so common and pervasive that people just live on 1/3 of their gross income. Whether that is an achievement, I have no idea.

Hint: It is an Asian country.

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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 8:48 pm

triceratop wrote:
edit: yet another way to state the point is that according to your model, the required savings discontinuously drops in the year that one fully pays off the mortgage. That's a sign that the model is nonsensical.



triceratop,

A person could always adjust the model with the amount to pay off the mortgage at any point of time and reduce the savings accordingly.

KlangFool

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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 8:54 pm

KlangFool wrote:
triceratop wrote:
edit: yet another way to state the point is that according to your model, the required savings discontinuously drops in the year that one fully pays off the mortgage. That's a sign that the model is nonsensical.



triceratop,

A person could always adjust the model with the amount to pay off the mortgage at any point of time and reduce the savings accordingly.

KlangFool


Yes, precisely! This is what I proposed to do. I was saying your analysis is flawed for precisely this reason. I'm glad we agree. :)
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 8:56 pm

KlangFool wrote:
triceratop wrote:
1. Yes, obviously.

2. No, your system "works" in that you will only retire after having enough savings. But that's only half of it. A model which only lets you retire after having accumulated 100x expenses also "works" while being more conservative. Keep in mind that we are talking about possibly years of one's life working that may be unnecessary due to your oversimplification. That is, it is not a good estimate at all. In my field we would call it a loose upper bound, which one should tighten to make useful.


triceratop,

<< Keep in mind that we are talking about possibly years of one's life working that may be unnecessary due to your oversimplification. That is, it is not a good estimate at all.>>

How would that be so? I am making an estimate of the annual expense that is easy to calculate. It is up to the person to decide the number by choosing a multiple. Why do you assume that the number has to be 100X? It could be any number

KlangFool


The point is your model can be wrong and yet still not result in a situation where one runs out of savings. Models can be wrong on the safe side too. When that is the case the model recommends working more when unnecessary.

That's the point that my 100x number was making.
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 9:02 pm

triceratop wrote:
The point is your model can be wrong and yet still not result in a situation where one runs out of savings. Models can be wrong on the safe side too. When that is the case the model recommends working more when unnecessary.

That's the point that my 100x number was making.



triceratop,

In order for that to be true, a person would have to assume that his medical expense would not increase tremendously when he is no longer subsidized by the employer. That is the wild card.

KlangFool

P.S.: My current best guess for my annual medical cost to retire before 62 years old is around 20K per year.
Last edited by KlangFool on Sat Mar 11, 2017 9:07 pm, edited 1 time in total.

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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 9:06 pm

KlangFool wrote:
triceratop wrote:
The point is your model can be wrong and yet still not result in a situation where one runs out of savings. Models can be wrong on the safe side too. When that is the case the model recommends working more when unnecessary.

That's the point that my 100x number was making.



triceratop,

In order for that to be true, a person would have to assume that his medical expense would not increase tremendously when he is no longer subsidized by the employer. That is the wild card.

KlangFool


That is a separate discussion. I thought we were discussing the mortgage and its relation to needed savings once the mortgage is paid off. What do mortgages have to do with medical expenses?!
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 9:11 pm

triceratop wrote:
KlangFool wrote:
triceratop wrote:
The point is your model can be wrong and yet still not result in a situation where one runs out of savings. Models can be wrong on the safe side too. When that is the case the model recommends working more when unnecessary.

That's the point that my 100x number was making.



triceratop,

In order for that to be true, a person would have to assume that his medical expense would not increase tremendously when he is no longer subsidized by the employer. That is the wild card.

KlangFool


That is a separate discussion. I thought we were discussing the mortgage and its relation to needed savings once the mortgage is paid off. What do mortgages have to do with medical expenses?!


triceratop,

Let's assume the annual expense is 60K per year, mortgage = 20K per year. The remaining mortgage = 300K.

If a person pick 25 X annual expense as the number,

A) 25 X annual expense = 1.5 million

B) 25 X annual expense with paid off mortgage = 25 X (60K - 20K) + 300K = 1.3 million.

So, the number should be the lower of (A) and (B). It should be 1.3 million.

KlangFool

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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 9:16 pm

KlangFool wrote:
triceratop wrote:
KlangFool wrote:
triceratop wrote:
The point is your model can be wrong and yet still not result in a situation where one runs out of savings. Models can be wrong on the safe side too. When that is the case the model recommends working more when unnecessary.

That's the point that my 100x number was making.



triceratop,

In order for that to be true, a person would have to assume that his medical expense would not increase tremendously when he is no longer subsidized by the employer. That is the wild card.

KlangFool


That is a separate discussion. I thought we were discussing the mortgage and its relation to needed savings once the mortgage is paid off. What do mortgages have to do with medical expenses?!


triceratop,

Let's assume the annual expense is 60K per year, mortgage = 20K per year. The remaining mortgage = 300K.

If a person pick 25 X annual expense as the number,

A) 25 X annual expense = 1.5 million

B) 25 X annual expense with paid off mortgage = 25 X (60K - 20K) + 300K = 1.3 million.

So, the number should be the lower of (A) and (B). It should be 1.3 million.

KlangFool


But (B) will always be less than (A) so choosing the lower will always result in choosing (B). In other words you've proven that one should always use my number(B) rather than your number(A). :)

Now, that $200k difference in projected required savings is quite a lot so perhaps 5-10 years of extra work projected! Clearly your models inaccuracies have staggering implications for recommended future work expectations.

Your calculations also do not differ on medical expenses so it's not clear why you brought that up in an unrelated discussion
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 9:26 pm

triceratop wrote:
KlangFool wrote:
triceratop wrote:
KlangFool wrote:
triceratop wrote:
The point is your model can be wrong and yet still not result in a situation where one runs out of savings. Models can be wrong on the safe side too. When that is the case the model recommends working more when unnecessary.

That's the point that my 100x number was making.



triceratop,

In order for that to be true, a person would have to assume that his medical expense would not increase tremendously when he is no longer subsidized by the employer. That is the wild card.

KlangFool


That is a separate discussion. I thought we were discussing the mortgage and its relation to needed savings once the mortgage is paid off. What do mortgages have to do with medical expenses?!


triceratop,

Let's assume the annual expense is 60K per year, mortgage = 20K per year. The remaining mortgage = 300K.

If a person pick 25 X annual expense as the number,

A) 25 X annual expense = 1.5 million

B) 25 X annual expense with paid off mortgage = 25 X (60K - 20K) + 300K = 1.3 million.

So, the number should be the lower of (A) and (B). It should be 1.3 million.

KlangFool


But (B) will always be less than (A) so choosing the lower will always result in choosing (B). In other words you've proven that one should always use my number(B) rather than your number(A). :)

Now, that $200k difference in projected required savings is quite a lot so perhaps 5-10 years of extra work projected! Clearly your models inaccuracies have staggering implications for recommended future work expectations.

Your calculations also do not differ on medical expenses so it's not clear why you brought that up in an unrelated discussion


triceratop,

In my case, the medical expense will increase about 10K per year if I retire before 62 years old. So, if you take 1.3 million and add 25 X 10K, you get 1.55 million. It is close to (A).

KlangFool

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Re: Putting Savings in Perspective

Post by nps » Sat Mar 11, 2017 9:54 pm

OP, not sure why you calculate this percentage. You seem to be comparing it to a benchmark of spending 80 percent of pre-retirement expenses in retirement and concluding that you are good. However, many of your deductions from gross pay will still exist. You will still pay income taxes and medical premiums, and as another poster pointed out your medical premiums may increase significantly.

You're probably still in good shape, I just don't see comparing gross pay to net pay to be a particularly useful way to assess that.

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Re: Putting Savings in Perspective

Post by triceratop » Sat Mar 11, 2017 9:59 pm

KlangFool wrote:
triceratop wrote:
KlangFool wrote:
triceratop wrote:
KlangFool wrote:
triceratop,

In order for that to be true, a person would have to assume that his medical expense would not increase tremendously when he is no longer subsidized by the employer. That is the wild card.

KlangFool


That is a separate discussion. I thought we were discussing the mortgage and its relation to needed savings once the mortgage is paid off. What do mortgages have to do with medical expenses?!


triceratop,

Let's assume the annual expense is 60K per year, mortgage = 20K per year. The remaining mortgage = 300K.

If a person pick 25 X annual expense as the number,

A) 25 X annual expense = 1.5 million

B) 25 X annual expense with paid off mortgage = 25 X (60K - 20K) + 300K = 1.3 million.

So, the number should be the lower of (A) and (B). It should be 1.3 million.

KlangFool


But (B) will always be less than (A) so choosing the lower will always result in choosing (B). In other words you've proven that one should always use my number(B) rather than your number(A). :)

Now, that $200k difference in projected required savings is quite a lot so perhaps 5-10 years of extra work projected! Clearly your models inaccuracies have staggering implications for recommended future work expectations.

Your calculations also do not differ on medical expenses so it's not clear why you brought that up in an unrelated discussion


triceratop,

In my case, the medical expense will increase about 10K per year if I retire before 62 years old. So, if you take 1.3 million and add 25 X 10K, you get 1.55 million. It is close to (A).

KlangFool


So adjust your needed expense to include higher medical expenses and then apply the appropriate multiplier(e.g. 25x) to determine the needed savings. But that has nothing to do with a mortgage. You are back reasoning with other expenses to justify including the mortgage when you yourself showed it should not be included. It is simply poor logic: mortgage and medical expenses have nothing to do with each other and it is simply a coincidence that the two errors roughly cancel out in your case.

Not sure there is much more I can say. Hopefully it is clear to all that medical expenses and mortgage have nothing to do with each other.
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Re: Putting Savings in Perspective

Post by KlangFool » Sat Mar 11, 2017 10:07 pm

triceratop wrote:
So adjust your needed expense to include higher medical expenses and then apply the appropriate multiplier(e.g. 25x) to determine the needed savings. But that has nothing to do with a mortgage. You are back reasoning with other expenses to justify including the mortgage when you yourself showed it should not be included. It is simply poor logic: mortgage and medical expenses have nothing to do with each other and it is simply a coincidence that the two errors roughly cancel out in your case.

Not sure there is much more I can say. Hopefully it is clear to all that medical expenses and mortgage have nothing to do with each other.


triceratop,

<< So adjust your needed expense to include higher medical expenses and then apply the appropriate multiplier(e.g. 25x) to determine the needed savings.>>

It is a crap shot to predict OP's medical expense 10+ years from now. So, you could take the crap shot. Or, use the mortgage as the safety margin. In any case, it is an estimate.

KlangFool

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Re: Putting Savings in Perspective

Post by Garco » Sat Mar 11, 2017 10:21 pm

Because the calculations here are complicated, and certain assumptions might be challenged (e.g., are you going to have a mortgage forever? What if you sell your home and downsize?), it's sometimes useful to see how you're doing just using rules of thumb. One that we sometimes see on this discussion board is that you should be putting 10-15% of your gross income into a retirement fund -- that could include your own plus employer's contribution). If you do that for 30 years, and you collect SS at age 67, you will be saving "enough" in all likelihood. If you put another 5% of your salary in per year, then you will almost for sure reach the target.

I had 15% contributions for 43 years before I retired -- with no mortgage payment keft, no left-over expenses for my kids' college, etc. I supplemented the savings after the kids graduated. And I'm doing fine.

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Re: Putting Savings in Perspective

Post by BrandonBogle » Sat Mar 11, 2017 10:42 pm

KlangFool wrote:So, are you saying that you will reach 33X your current annual expense by 52 or earlier?


No, 25x at 52 based on total expenses and no other sources of income. I am including SSA starting at age 67 at 50% of what my annual estimate of benefits provides (b/c, account for likelihood of changes and that payment assumption is based on not retiring early), so I would reduce my withdrawal rate then. "25x at 52" though is for the full amount.

KlangFool wrote:<< Substituting gross with expenses, I got from saving 30% to saving 53% and easy to justify letting some lifestyle creep occur.>>

Changing the percentage does not change the actual amount that you are saving. And, whether you will reach your number by a certain age. So, why you justify your lifestyle creep by this?


Because quality of life has suffered. Today was the first day in 9 months I sat down at a restaurant and ate -- and it was only at Panera Bread for a local chapter Bogleheads meetup. Last month before a friend's wedding I bought a new shirt for the first time in a year. Savings have been taken too far to the extreme.

KlangFool wrote:What is your number? Can you reach your number by the targeted age?


I will get to my number. If it takes me longer than 52, so be it.

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Re: Putting Savings in Perspective

Post by BrandonBogle » Sat Mar 11, 2017 10:46 pm

delamer wrote:One flaw in your thinking (#3) is that 56% does not include the medical premiums you are having taken out of your paycheck. And the portion of the premiums you are paying is probably just a fraction of the real cost because your employer is covering the rest. All those costs will be have to be dealt with in a early retirement budget. Cost and availability of health insurance is a huge issue for pre-Medicare retirees. Even under the current law, it can be tough to find good, affordable coverage. And the future is uncertain.

Not taking away from your current frugality at all, but medical costs cannot be ignored in your planning which means your take-home percentage is misleading.


A very good point, thank you. I'm accounting for my portion of the premiums, but not my employers and I know that is a significant cost. I'll have to keep in mind that I'm underestimating medical costs currently.

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Re: Putting Savings in Perspective

Post by BrandonBogle » Sat Mar 11, 2017 10:51 pm

KlangFool wrote:How would you know that? You are assuming that you will not be forced into early retirement involuntary.

I had worked for 30+ years. So far, I only know two persons among all my ex-co-workers worked until the retirement age of 62 or older. I know for certain that I will not be fully employed until 62 years old. This is independent of whether I pay off the mortgage.

KlangFool


While my job is not bulletproof and thus, I accept plans may change if I lose it, I'll say that I'm on a team where the last three retirees (past 5 years) were above 65, and we currently have one 62 year old, and three 55+ on the team. One would hope my company would hold onto the three of us 30+ individuals so they don't shoot themselves in the foot. But then, it's a Fortune 500 company and how many of those think ahead and logically!

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Re: Putting Savings in Perspective

Post by BrandonBogle » Sat Mar 11, 2017 11:00 pm

Garco wrote:Because the calculations here are complicated, and certain assumptions might be challenged (e.g., are you going to have a mortgage forever? What if you sell your home and downsize?), it's sometimes useful to see how you're doing just using rules of thumb. One that we sometimes see on this discussion board is that you should be putting 10-15% of your gross income into a retirement fund -- that could include your own plus employer's contribution). If you do that for 30 years, and you collect SS at age 67, you will be saving "enough" in all likelihood. If you put another 5% of your salary in per year, then you will almost for sure reach the target.

I had 15% contributions for 43 years before I retired -- with no mortgage payment keft, no left-over expenses for my kids' college, etc. I supplemented the savings after the kids graduated. And I'm doing fine.


Thank you. The ultimate goal for this thread was to shore up the mental accounting that I can allow some lifestyle creep without thinking I'm be eating Alpo in retirement and/or won't get to retirement until 67. I am NOT financially independent yet, but strive to be so but have felt it has gotten in the way of living now (instead of just surviving).

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Re: Putting Savings in Perspective

Post by Cash » Sun Mar 12, 2017 4:33 pm

BrandonBogle wrote:(b) my quality of life has suffered from excessive saving


lol don't you drive a Tesla?

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Re: Putting Savings in Perspective

Post by BrandonBogle » Sun Mar 12, 2017 5:26 pm

Cash wrote:
BrandonBogle wrote:(b) my quality of life has suffered from excessive saving


lol don't you drive a Tesla?


Yes. And you would be amazed how that didn't change things. I posted when I thought about it and said I was willing to even exchange working longer to take the short term hit on my finances to pay for it. And I did reduce my 401k holdings to free up cash flow for the loan payment (still saving 10% of my gross in the 401k + annual Roth IRA)... for three months. Then I figured hey, it is better to put in my traditional 401k instead of the Roth, so I ratcheted my 401k back up to the $17.5k limit and cut back to account for reduced cash flow. Then by March 2016 I couldn't let the opportunity to make 2015's Roth Contribution slip by, so I cut back some more, dipped into my cash reserves. And of course, I then decided to not let opportunity cost get the better of me and made 2016's contribution in April, reducing my usual $10-$15k of cash in 1% savings down to about $5k. So I buckled down and said I have to get the reserves up. So I did that and here I am realizing I put myself in such a position because I wanted to maximize savings over anything.

TL;DR, Yes. Rather than accepting I would not save as much for a period of time, I cut spending out ridiculously to pay for the car while maximizing savings. :oops:

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Re: Putting Savings in Perspective

Post by KlangFool » Mon Mar 13, 2017 12:42 pm

OP,

Some suggestions / observations / recommendations in no particular orders

1) You need a plan that works for you and you can live with. Stop going from one extreme to other. From buying a Tesla to not eating out in a restaurant in a few months is too extreme.

2) Stop making and changing your decision too quickly. Stick with any plan for at least a while.

3) Fear only work for a while. Telling yourself that you are doing this so that you will not eat Alpo in 20 years does not work over a long period of time. You need to reward yourself regularly for reaching some milestone.

For example, set up a slush fund of money that you can spend on anything without guilt for reaching a milestone. Aka, give yourself some extra money to spend when you reach 100K.

4) A system/plan require you to make a lot of decision is not a good plan/system. Use "Pay Yourself First". Save whatever you want and spend the rest without guilt or any thinking. The system should be fully automatic and let you live your life.

5) Life is a marathon. A little bit over a long period of time is what matters.

KlangFool

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Re: Putting Savings in Perspective

Post by HomerJ » Mon Mar 13, 2017 1:06 pm

KlangFool wrote:How would you know that? You are assuming that you will not be forced into early retirement involuntary.

I had worked for 30+ years. So far, I only know two persons among all my ex-co-workers worked until the retirement age of 62 or older. I know for certain that I will not be fully employed until 62 years old. This is independent of whether I pay off the mortgage.


So pay off the mortgage before age 62.

We got a 15-year mortgage when we bought a new house at age 35. Paid it off in 8 years.

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Re: Putting Savings in Perspective

Post by triceratop » Mon Mar 13, 2017 1:09 pm

HomerJ wrote:
KlangFool wrote:How would you know that? You are assuming that you will not be forced into early retirement involuntary.

I had worked for 30+ years. So far, I only know two persons among all my ex-co-workers worked until the retirement age of 62 or older. I know for certain that I will not be fully employed until 62 years old. This is independent of whether I pay off the mortgage.


So pay off the mortgage before age 62.

We got a 15-year mortgage when we bought a new house at age 35. Paid it off in 8 years.



You'll find from reading the thread above that KlangFool is irrationally compensating for uncertainty in future medical expenses by adding another error term in the form of expected mortgage payments in retirement, after the mortgage is fully paid off. That he is explicitly endorsing adding extra error rather than embracing the uncertainty in medical expenses is concerning.

Regardless, it is bad advice IMO.
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Re: Putting Savings in Perspective

Post by BrandonBogle » Mon Mar 13, 2017 1:13 pm

Another poster mentioned that I was only accounting for my portion of the insurance cost (not my employer's) and that finding insurance on my own would likely be more expensive than my employer's plan. Thus, for the time being, since I already could pay off my mortgage tomorrow from my taxable account (not touching my 401k or Roth) and I already include my mortgage payment in my we desired expense level, I will simply use that as "mortgage or health" and just not discount my mortgage payments ever. These are estimates after all, and thus, that should provide a sufficient buffer to cover what I've missing in counting insurance costs.

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Re: Putting Savings in Perspective

Post by HomerJ » Mon Mar 13, 2017 1:17 pm

Ouch on the Tesla. Next time, save in a side account for those kind of purchases. Pay cash for luxuries or you can't afford them.

Or determine if you'd rather have one high-end item or a bunch of small stuff every week.

My wife drives a nice luxury car, but she is very frugal everywhere else.

I drive a Honda Civic, but I have no problems wasting $20 here, $50 there, etc. on silly small things.

I think both methods work.

Of course, my way drives my wife crazy, but I point out that I spent $30,000 less on my car, so blowing $2000 a year on silly stuff over the next 7-10 years is still cheaper. (FYI - pointing this out does not help me "win" the argument) :)

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Re: Putting Savings in Perspective

Post by Rainmaker41 » Mon Mar 13, 2017 1:22 pm

I agree with KlangFool on the merits of using actual dollar amounts, with investment gains projected in real terms. Rules of thumb are after all based on those actual calculations, tested for realism/feasibility for a broad base of personal financial situations, and then simplified into something like 'just save 20% of take-home income for retirement'.

Someone earning $40,000 might take home ~ $31,000 after FICA, federal, and state taxes, ignoring employer benefits and pre-tax savings for simplicity. If they then 'only' fill up a Roth IRA every year, their savings of $5,500 fail to meet that 20% rule of thumb, being only 17.7% of net income. Are they screwed because they failed to precisely follow the guideline?

Let's do the math.

If they save $5,500 each year into a Roth IRA for 40 years and a get a 2% annualized real return, they will have $332,000 in current-value dollars upon retirement. At a 25:1 capital to withdrawal ratio (another rule of thumb), that provides $13,280 in annual retirement income. The average Social Security benefit according to a Google search is $16,000 annually. Put together, they'd have $29,000 in annual income to spend, which would exceed their total annual spending while working of $25,500 by a nontrivial margin.

I don't think this renders reasonable rules of thumb useless, but it does illustrate how using actual numbers can decrease uncertainty and hopefully stress.

OP, to me it looks like you know what you are doing and have a realistic, respectable plan. Do your math, confirm your plan's validity with your numbers, and then try not to stress if you are already meeting your goalposts periodically. :)
Last edited by Rainmaker41 on Mon Mar 13, 2017 1:24 pm, edited 2 times in total.
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Re: Putting Savings in Perspective

Post by BrandonBogle » Mon Mar 13, 2017 1:23 pm

HomerJ wrote:Ouch on the Tesla. Next time, save in a side account for those kind of purchases. Pay cash for luxuries or you can't afford them.

Or determine if you'd rather have one high-end item or a bunch of small stuff every week.

My wife drives a nice luxury car, but she is very frugal everywhere else.

I drive a Honda Civic, but I have no problems wasting $20 here, $50 there, etc. on silly small things.

I think both methods work.

Of course, my way drives my wife crazy, but I point out that I spent $30,000 less on my car, so blowing $2000 a year on silly stuff over the next 7-10 years is still cheaper. (FYI - pointing this out does not help me "win" the argument) :)


I did. I saved until I could buy the car completely from what I saved in my taxable account. Then I took a 1.49% loan instead of paying capital gains taxes and rather than liquidate anything or reducing savings, I ended up cutting back on spending to cover the payment out of fear. I've started loosening the reins a bit, slowly, to avoid jumping to any extremes.

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Re: Putting Savings in Perspective

Post by triceratop » Mon Mar 13, 2017 1:25 pm

BrandonBogle wrote:
HomerJ wrote:Ouch on the Tesla. Next time, save in a side account for those kind of purchases. Pay cash for luxuries or you can't afford them.

Or determine if you'd rather have one high-end item or a bunch of small stuff every week.

My wife drives a nice luxury car, but she is very frugal everywhere else.

I drive a Honda Civic, but I have no problems wasting $20 here, $50 there, etc. on silly small things.

I think both methods work.

Of course, my way drives my wife crazy, but I point out that I spent $30,000 less on my car, so blowing $2000 a year on silly stuff over the next 7-10 years is still cheaper. (FYI - pointing this out does not help me "win" the argument) :)


I did. I saved until I could buy the car completely from what I saved in my taxable account. Then I took a 1.49% loan instead of paying capital gains taxes and rather than liquidate anything or reducing savings, I ended up cutting back on spending to cover the payment out of fear. I've started loosening the reins a bit, slowly, to avoid jumping to any extremes.


What is the term on that loan? You might be able to exceed the interest rates with treasuries too.
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Re: Putting Savings in Perspective

Post by BrandonBogle » Mon Mar 13, 2017 1:25 pm

triceratop wrote:
BrandonBogle wrote:I did. I saved until I could buy the car completely from what I saved in my taxable account. Then I took a 1.49% loan instead of paying capital gains taxes and rather than liquidate anything or reducing savings, I ended up cutting back on spending to cover the payment out of fear. I've started loosening the reins a bit, slowly, to avoid jumping to any extremes.


What is the term on that loan? You might be able to exceed the interest rates with treasuries too.


1.49% for 5.5 years

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Re: Putting Savings in Perspective

Post by triceratop » Mon Mar 13, 2017 1:28 pm

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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