What’s the magic savings rate???

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crockpotinvesting
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What’s the magic savings rate???

Post by crockpotinvesting » Fri Mar 30, 2018 11:22 am

I’m trying to figure out the right retirement savings rate. Sometimes I feel like I’m not investing enough for the future and other times I feel like I’m missing out on things because I’m not spending enough presently.

Income: including bonuses around $225k
Retirement savings: around $100k
Age: late 20s
Retirement savings rate: 13-16%
100% invested in equities
Also- putting about 10-20% of income into savings accounts /taxable accounts (100% equities) for future expenses, kids, houses, emergencies, etc.

If your wondering why such little saved in retirement accounts vs income is because income has been growing at a high rate ( 6 years ago income was only $50k).

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Ice-9
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Re: What’s the magic savings rate???

Post by Ice-9 » Fri Mar 30, 2018 11:27 am

Good work so far for being late 20s!

A Wade Pfau study a few years ago says 16.62% :happy
http://www.mymoneyblog.com/what-is-a-sa ... 16-62.html

Most Bogleheadish personal finance authors say 15%.

It's up to you. I shoot for a floor of 15% and try to add to that throughout the year. If you're single without kids, you may want to save more now while you don't have as many pressures to do otherwise and have more time for it all to compound before retirement.

Crisium
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Re: What’s the magic savings rate???

Post by Crisium » Fri Mar 30, 2018 11:34 am

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

Makes some assumptions, but inspiring if you need saving motivation.

Note it's based on net and not gross income.

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flamesabers
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Re: What’s the magic savings rate???

Post by flamesabers » Fri Mar 30, 2018 11:36 am

I think the ideal savings rate is subjective. It depends on what kind of retirement you would like to have, your cost of living at retirement age, when you plan to retire and whether you'll have access to additional sources of income such as a pension and social security when you stop working.

Instead of trying to find a fixed savings rate, I would suggest considering the following:

1. Do you have an emergency fund? (The amount of this emergency fund can vary depending on your job security)
2. Are you maxing out your contributions to your retirement accounts?
3. Are you tracking your expenses?

If you're good with #1 and #2, I think you're on the right track. The point of #3 is to evaluate your priorities. For instance, would you rather go on a nice vacation or buy a new car instead of retiring a little earlier? I'm someone who would preserve to conserve money for an earlier retirement, but I also understand people who want to enjoy life to the fullest while they're still young. There's not a necessarily right or wrong answer to the question, but it may help to identify what will make you most happy in the long-term.

bigred77
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Re: What’s the magic savings rate???

Post by bigred77 » Fri Mar 30, 2018 11:38 am

I'm a proponent of 25% - 33% (if possible).

If your making less, a lower savings rate is reasonable. You have to meet your needs and SS should replace a larger percentage of your pre-retirement salary.

If you are pursuing an extremely early retirement, you might need to go higher.

I've found balance in my own life subscribing to the above.

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Pajamas
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Re: What’s the magic savings rate???

Post by Pajamas » Fri Mar 30, 2018 11:42 am

Save and invest everything you don't spend.

Spend to fulfill needs and some wants. Don't become extravagant just because you have more income if you want to be financially independent.

chevca
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Re: What’s the magic savings rate???

Post by chevca » Fri Mar 30, 2018 11:43 am

There isn't one. :happy

Pay yourself first, pay the bills, keep food in the fridge, gas in the car, have a little fun within reason, and save the rest. There's all the magic you need.

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goingup
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Re: What’s the magic savings rate???

Post by goingup » Fri Mar 30, 2018 11:56 am

I read this here years ago and think it is probably true:

*Save 10% and you'll do fine
*Save 20% and you'll thrive
*Save 30% and you'll be wealthy

Nate79
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Re: What’s the magic savings rate???

Post by Nate79 » Fri Mar 30, 2018 12:06 pm

I think there is no magic savings rate. Often 15% is mentioned as a minimum but it really depends more on how long you save, how much you save, and what will be your expenses in retirement. Also, if you are saving X% but taking on debt then it is a false savings rate. In other words I would look at net worth in addition to savings rate to get a more complete financial picture.

TareNeko
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Re: What’s the magic savings rate???

Post by TareNeko » Fri Mar 30, 2018 12:07 pm

So you are saving between 23% to 36%. It is not bad, but for your income level, I think that is on the low side. Let's say 30% goes to taxes, and let's take the average value for your savings (~30%), that means you are spending 40% of your money, which is 90k/year or 7.5k/month. Unless you are paying mortgage or student debt, I feel like that is a little high. You could cut 1-2k/month in spending and direct it to savings.

Young age & large income is a killer combo. Most people have either young age (with lower income) or large income (when they are older). Take advantage of your situation.
crockpotinvesting wrote:
Fri Mar 30, 2018 11:22 am
Retirement savings rate: 13-16%
Also- putting about 10-20% of income into savings accounts /taxable accounts

meaghansketch
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Re: What’s the magic savings rate???

Post by meaghansketch » Fri Mar 30, 2018 12:17 pm

flamesabers wrote:
Fri Mar 30, 2018 11:36 am
Instead of trying to find a fixed savings rate, I would suggest considering the following:

1. Do you have an emergency fund? (The amount of this emergency fund can vary depending on your job security)
2. Are you maxing out your contributions to your retirement accounts?
3. Are you tracking your expenses?
I think #2 is not a great measure for many people - it all depends what your retirement accounts are and what your expenses are. If you are self-employed and have a SEP - IRA do you need to put in $55,000 a year to be said to be maxing out your retirement accounts? If you don't have access to a 401(k) at all because you are a w2 employee whose employer doesn't offer one, are you fine only contributing $5,500 to an IRA? It should be based on need, which is dictated not by income but by expenses.

The Wizard
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Re: What’s the magic savings rate???

Post by The Wizard » Fri Mar 30, 2018 12:31 pm

Saving 30% of gross income is the magic savings rate...
Attempted new signature...

KlangFool
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Re: What’s the magic savings rate???

Post by KlangFool » Fri Mar 30, 2018 12:32 pm

crockpotinvesting wrote:
Fri Mar 30, 2018 11:22 am
I’m trying to figure out the right retirement savings rate. Sometimes I feel like I’m not investing enough for the future and other times I feel like I’m missing out on things because I’m not spending enough presently.

Income: including bonuses around $225k
Retirement savings: around $100k
Age: late 20s
Retirement savings rate: 13-16%
100% invested in equities
Also- putting about 10-20% of income into savings accounts /taxable accounts (100% equities) for future expenses, kids, houses, emergencies, etc.

If your wondering why such little saved in retirement accounts vs income is because income has been growing at a high rate ( 6 years ago income was only $50k).
OP,

First, you need to get rid of the concept "retirement saving". You will not work until the retirement age of 62 years old. So, you should aim for Financial Independent instead.

KlangFool

Spewin
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Re: What’s the magic savings rate???

Post by Spewin » Fri Mar 30, 2018 12:39 pm

I suggest saving 20% of your gross for retirement (including employer match, so if they will match 3 to need to put in 17). After that another 10% should be saved for irregular expenses like cars and home repairs.

That's not what I do myself, but if one isn't willing to do a detailed analysis, then I think the spine role of thumb will suffice.

bling
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Re: What’s the magic savings rate???

Post by bling » Fri Mar 30, 2018 1:10 pm

i remember once i was talking to my coworkers and i said, "retiring is easy! for every year you can save half your income, is one year you can retire at the same standard of living."

in reality your standard would be even higher because of returns/compounding/etc (not to mention much lower expense during retirement).... but of course they looked at me like i just said the dumbest thing in the world.

gotester2000
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Re: What’s the magic savings rate???

Post by gotester2000 » Fri Mar 30, 2018 1:15 pm

Save 50% and you will be FI in 10 years. 30% might do it in 15. You have the income to achieve these numbers. My strategy was to spend on needs and save everything else.

remomnyc
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Re: What’s the magic savings rate???

Post by remomnyc » Fri Mar 30, 2018 1:16 pm

Crisium wrote:
Fri Mar 30, 2018 11:34 am
http://www.mrmoneymustache.com/2012/01/ ... etirement/

Makes some assumptions, but inspiring if you need saving motivation.

Note it's based on net and not gross income.
This Mr. Money Mustache post was the one that made me realize that I could possibly retire early. It is a powerfully motivating graph.

LiterallyIronic
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Re: What’s the magic savings rate???

Post by LiterallyIronic » Fri Mar 30, 2018 1:26 pm

remomnyc wrote:
Fri Mar 30, 2018 1:16 pm
Crisium wrote:
Fri Mar 30, 2018 11:34 am
http://www.mrmoneymustache.com/2012/01/ ... etirement/

Makes some assumptions, but inspiring if you need saving motivation.

Note it's based on net and not gross income.
This Mr. Money Mustache post was the one that made me realize that I could possibly retire early. It is a powerfully motivating graph.
From that page: "A middle-class family with a 50k take-home pay who saves 10% of their income ($5k) is actually better than average these days. But simply cutting cable TV and a few lattes would instantly boost their savings to 15%"

This family is going to be able to invest $2,500 more per year by cutting TV and lattes? That's over $208/month. That's a ridiculously high amount to assume a family is spending on "cable TV and a few lattes."

I'd rather see a chart that doesn't have the assumption of "You want your 'Stash' to last forever". I'm more interested in bouncing my last check.

whomever
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Re: What’s the magic savings rate???

Post by whomever » Fri Mar 30, 2018 1:39 pm

That's over $208/month. That's a ridiculously high amount to assume a family is spending on "cable TV and a few lattes."
I worked with a group once that had a habit of morning and afternoon trips to Starbucks, at maybe $4 each trip, and a $10 lunch out. $18 a day times 20 working days a month is $360 a month. And that's not including the cable, iphone, hulu, netflix, fastest internet available, etc., or whatever the other spouse spends.

Just to be clear: it's a free country; people should spend on whatever blows their skirts up. My coffee may have been Folger's instant, but I took a couple months of LWOP every year to go backpacking; I'm not questioning how anyone spends their money. But the little things can indeed add up.

Jags4186
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Re: What’s the magic savings rate???

Post by Jags4186 » Fri Mar 30, 2018 1:42 pm

LiterallyIronic wrote:
Fri Mar 30, 2018 1:26 pm
remomnyc wrote:
Fri Mar 30, 2018 1:16 pm
Crisium wrote:
Fri Mar 30, 2018 11:34 am
http://www.mrmoneymustache.com/2012/01/ ... etirement/

Makes some assumptions, but inspiring if you need saving motivation.

Note it's based on net and not gross income.
This Mr. Money Mustache post was the one that made me realize that I could possibly retire early. It is a powerfully motivating graph.
From that page: "A middle-class family with a 50k take-home pay who saves 10% of their income ($5k) is actually better than average these days. But simply cutting cable TV and a few lattes would instantly boost their savings to 15%"

This family is going to be able to invest $2,500 more per year by cutting TV and lattes? That's over $208/month. That's a ridiculously high amount to assume a family is spending on "cable TV and a few lattes."

I'd rather see a chart that doesn't have the assumption of "You want your 'Stash' to last forever". I'm more interested in bouncing my last check.
Have you seen what a regular cable bill costs? Hell, I pay $95/mo just for 25mbps down/5mbps up internet. Of course if I go with the “triple play” I can get a phone I’d never use and television for $150 a month (+taxes and box rental fee and remote control rental fee and whatever else they can think of charging me for). Thanks Comcast and an apartment building that doesn’t allow any other competition!

heyyou
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Re: What’s the magic savings rate???

Post by heyyou » Fri Mar 30, 2018 4:52 pm

Sometimes I feel like I’m not investing enough for the future and other times I feel like I’m missing out on things because I’m not spending enough presently.
Both of those thoughts may never stop occurring, but you can get used to them.

There will always be coworkers with nicer cars, bigger houses, more expensive vacations, or a big boat. Some of them will retire in their sixties with a mortgage payment due to having steadily refinanced their home. They will all stay at work when you retire early. Some will say you got lucky in the stock market, without mentioning that all you did was max out every available retirement account plus some extra savings for 30 years or less.

The good news is after living within your means while working, for retirement you will need to have saved and invested to 25-30 times your annual spending. That number will also be less for you than for your coworkers who only saved enough for the matching contribution to their retirement accounts.

Note that you were about as happy in school as you are now, but you were living on much less income.

TareNeko
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Re: What’s the magic savings rate???

Post by TareNeko » Sat Mar 31, 2018 6:49 pm

I was thinking about this question a bit more.

To me, it doesn't make sense to go with a traditional savings rate if you are in higher income group. Saving 15% of your income so that you can retire after working for 40 years does not make any sense. Why do you have to maintain an expensive life style, and lock yourself to 40 years of work?

We save about 40% of our gross income not including the mortgage principal and student loan payments (which will be paid off in 3.5 years). We could save only 15% and live in a bigger house, drive more expensive cars, go to more vacations, eat out more but would that really make us any happier? We rather reach FI as early as possible, so that we have options. So that we have a bit more control on our lives.

bert09
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Re: What’s the magic savings rate???

Post by bert09 » Sat Mar 31, 2018 7:29 pm

At that income, unless I am wrong, the most you can put in tax advantaged retirement accounts is $23.5k right? Not counting HSAs? I am in a similar position and outside of an emergency fund I put everything I have left after each months expenses in my taxable account which has a fairly aggressive AA. If I were going to buy a house in he next 6 months I’d do the same but with a more conservative AA.

blinx77
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Re: What’s the magic savings rate???

Post by blinx77 » Sat Mar 31, 2018 7:36 pm

Sorry, 30% on $225k with no kids is weaksauce. You should be able to hit 50% even in SF/NY/DC, even more elsewhere.

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Will do good
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Re: What’s the magic savings rate???

Post by Will do good » Sat Mar 31, 2018 7:40 pm

blinx77 wrote:
Sat Mar 31, 2018 7:36 pm
Sorry, 30% on $225k with no kids is weaksauce. You should be able to hit 50% even in SF/NY/DC, even more elsewhere.
+1

Near the end of my career with 2 kids in college, I was still saving more that the OP. LBYM!

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pennstater2005
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Re: What’s the magic savings rate???

Post by pennstater2005 » Sat Mar 31, 2018 7:42 pm

goingup wrote:
Fri Mar 30, 2018 11:56 am
I read this here years ago and think it is probably true:

*Save 10% and you'll do fine
*Save 20% and you'll thrive
*Save 30% and you'll be wealthy
I like that.
“If you think nobody cares if you're alive, try missing a couple of car payments.” – Earl Wilson

Bacchus01
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Re: What’s the magic savings rate???

Post by Bacchus01 » Sat Mar 31, 2018 7:47 pm

TareNeko wrote:
Fri Mar 30, 2018 12:07 pm
So you are saving between 23% to 36%. It is not bad, but for your income level, I think that is on the low side. Let's say 30% goes to taxes, and let's take the average value for your savings (~30%), that means you are spending 40% of your money, which is 90k/year or 7.5k/month. Unless you are paying mortgage or student debt, I feel like that is a little high. You could cut 1-2k/month in spending and direct it to savings.

Young age & large income is a killer combo. Most people have either young age (with lower income) or large income (when they are older). Take advantage of your situation.
crockpotinvesting wrote:
Fri Mar 30, 2018 11:22 am
Retirement savings rate: 13-16%
Also- putting about 10-20% of income into savings accounts /taxable accounts
30% to taxes seems pretty low

Shikoku
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Re: What’s the magic savings rate???

Post by Shikoku » Sat Mar 31, 2018 7:48 pm

Pajamas wrote:
Fri Mar 30, 2018 11:42 am
Save and invest everything you don't spend.

Spend to fulfill needs and some wants. Don't become extravagant just because you have more income if you want to be financially independent.
This is what I do, and I call it "Pay Yourself Last" approach.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

Shikoku
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Re: What’s the magic savings rate???

Post by Shikoku » Sat Mar 31, 2018 8:29 pm

goingup wrote:
Fri Mar 30, 2018 11:56 am
I read this here years ago and think it is probably true:

*Save 10% and you'll do fine
*Save 20% and you'll thrive
*Save 30% and you'll be wealthy
This one hits home close. My employer's unwritten policy is to contribute sufficient amount to the tax deferred account of employees so that they can retire without any extra saving. The employer has been consistently contributing 16% of base salary irrespective of employee contributions. If someone is not looking for early FI, my employer's number would probably be good enough.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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Idle_Hanz
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Re: What’s the magic savings rate???

Post by Idle_Hanz » Sat Mar 31, 2018 8:58 pm

I'm taking the "As much as possible; as soon as possible." strategy for saving until financial independence is reached. I was given the personal opportunity to learn that just because someone has a lot of income today doesn't mean they'll still have it tomorrow. :|

I feel saving for financial independence is a much more immediate goal than a "retirement" that may or may not happen in 30-40 years. I don't know what I'll want out of life in the future decades; but I do know that I'd sure love to stop worrying about my source of income asap.

On the topic of missing out on things, what helps me is to think of what I want in terms of my time instead of dollars.
Is this thing I want worth X hours of my life to purchase? I find that the answer is usually "No, no its not."

MnD
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Re: What’s the magic savings rate???

Post by MnD » Sun Apr 01, 2018 6:10 pm

It varies. Now with the kids out of the house , 2 incomes and no debt we are at 27% of gross not counting employer match.
When we were new house and mortgage and/or 1 income with little kids and/or paying for 2 kids college bills it was lower.
10% was the bottom we tried to hold with maybe one or two years below that.
The peaks were double income pre-kids and now double income post-kids.
We've met all our goals for savings and long-planned retirement date later this year so that's all the "magic" I'm concerned about.
We've never been miserly - you don't know if you will have even 1 minute of retirement.

Soon2BXProgrammer
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Re: What’s the magic savings rate???

Post by Soon2BXProgrammer » Sun Apr 01, 2018 6:20 pm

LiterallyIronic wrote:
Fri Mar 30, 2018 1:26 pm
From that page: "A middle-class family with a 50k take-home pay who saves 10% of their income ($5k) is actually better than average these days. But simply cutting cable TV and a few lattes would instantly boost their savings to 15%"

This family is going to be able to invest $2,500 more per year by cutting TV and lattes? That's over $208/month. That's a ridiculously high amount to assume a family is spending on "cable TV and a few lattes."

I'd rather see a chart that doesn't have the assumption of "You want your 'Stash' to last forever". I'm more interested in bouncing my last check.
Actually 200 bucks a month is a doable amount of money to try to squeeze out of a middle class families budget that hasn't tried to squeeze it. (or didn't know how).

Cable tv to antenna
land line phone to obihai
switch from post paid phone to prepaid or republic wireless/google fi/etc. = varies
lattes, cut some lunches out (example, my wife wants to leave the house at 10:30 to do 2-3 hours of errands, this means we have to buy all 4 of us lunch.. if we wait an hour, we can eat at home before we go)., junk money spend, etc

on the point of bouncing the last check... the problem is.. when your talking a really long time horizon (60+ years), the difference between it lasting forever and running out of money is a very fine line. as effectively, most of your time period you can't spend down your principle, which means, you will probably never spend it down..

BogleMelon
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Re: What’s the magic savings rate???

Post by BogleMelon » Sun Apr 01, 2018 6:47 pm

I am wondering if anyone has a rule of thumb that is relative to the starting age of saving! All authors and rules presume that their audience are in their twenties, while the truth is fast majority of people start in their thirties or even later in life..
I would like to see something like that:
If you are starting at age 20-25 yrs = 10%
25-30 = 15%
30-35 = 25%
Or whatever the numbers are, but related to age.
Is there such article/study?
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

TheDDC
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Re: What’s the magic savings rate???

Post by TheDDC » Sun Apr 01, 2018 6:53 pm

38.5% savings relative to gross here, me age 35, wife 31 and two kids. That includes my required pension contribution, maxed out 403(b), and maxed out IRAs for each of us. I pay next to nothing in Federal tax for personal income at this savings rate. Goal is GOOSING savings at an early age by deeply cutting tax liabilities. My tax credit for two kids pretty much clobbers the self employment tax for 1099 side gig income.

-TheDDC

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vitaflo
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Re: What’s the magic savings rate???

Post by vitaflo » Sun Apr 01, 2018 7:01 pm

BogleMelon wrote:
Sun Apr 01, 2018 6:47 pm
I am wondering if anyone has a rule of thumb that is relative to the starting age of saving! All authors and rules presume that their audience are in their twenties, while the truth is fast majority of people start in their thirties or even later in life..
I would like to see something like that:
If you are starting at age 20-25 yrs = 10%
25-30 = 15%
30-35 = 25%
Or whatever the numbers are, but related to age.
Is there such article/study?
The MMM link posted above will help in this regard: http://www.mrmoneymustache.com/2012/01/ ... etirement/

Just use the years column to determine how far away from retirement you are, then look at the corresponding savings rate. So if you're 35 and want to retire at 67, you're 32 years away from retirement. Based on the chart on that page, you need to have a 25% savings rate to get there.

tmcc
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Re: What’s the magic savings rate???

Post by tmcc » Sun Apr 01, 2018 8:07 pm

the ambiguity of savings rate percentages on different websites is very annoying.

how do you guys weigh the combined pre/post savings vehicles? historically, i have just considered it all "after tax" when assessing it vs net. the probablity that its all after tax in retirement is very high.

for example, lets say my I make $100,000/yr. we will assume no state tax. lets assume the combined federal tax rate is about 18%. this means my take home is $6,833 +/-.

$10,000 401k
$5,000 employer match
$10,000 brokerage
$3,450 HSA

401k comes out of my check pretax. the match isnt even part of my take home but i still get it. HSA is pretax but used on after tax basis for health expenses. brokerage is already after tax.

what are my savings rates as % of gross and net?

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Wealth_Builder
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Re: What’s the magic savings rate???

Post by Wealth_Builder » Sun Apr 01, 2018 9:07 pm

First off, awesome numbers regarding age/income. Congrats there. I bet you worked hard to build your career.

I'm in almost the same boat as you- same age, similar income, no kids/wife (yet). But, for my case, I'd say between retirement 401k's, IRA's, real estate, and after-tax investments my savings rate is ~50%, probably a bit more (30% taxes, 20% living expenses). Here's why:

- I don't love my job and desire to not have one (it's a great job, but still takes a big time/energy investment). I'd rather hike the Pacific Crest Trail or live in Italy. Or, maybe one day I'll decide to take a job that makes very little, but I love the work.
- As other posters said, time is our biggest advantage - save now and the money will do the work in the long-run. Income you invest aggressively at 25 is worth 8X as income you invest at 46 (Rule of 72, 10% return, 7 years to double)
- Safety/Security- While I have a great job, who knows, maybe another recession will come and things will change. If so, I don't mind, I'll take the time off to travel and live off of passive income.
- I don't want to let lifestyle creep happen. "The more you make, the more you spend" results in wasting your best years working.

Ultimately, I want to spend my life pursuing my passions (regardless of whether they make money or not), so I'm trying to save aggressively to get ahead. Also, for me, I don't want expensive things or fancy trips. I'd much rather bootstrap my travel anyways.

My response is a bit long-winded, but I do hope you see the incredible opportunity you have right now (for the next few years) to focus on saving and get to a point where you're "Set for life". Maybe not where you are loaded, but where an extra 20k at a job doesn't change your decision-making process.

Anyways, best of luck! Great post too, I'm learning from the responses as well. :)

KlangFool
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Re: What’s the magic savings rate???

Post by KlangFool » Sun Apr 01, 2018 9:12 pm

tmcc wrote:
Sun Apr 01, 2018 8:07 pm
the ambiguity of savings rate percentages on different websites is very annoying.

how do you guys weigh the combined pre/post savings vehicles? historically, i have just considered it all "after tax" when assessing it vs net. the probablity that its all after tax in retirement is very high.

for example, lets say my I make $100,000/yr. we will assume no state tax. lets assume the combined federal tax rate is about 18%. this means my take home is $6,833 +/-.

$10,000 401k
$5,000 employer match
$10,000 brokerage
$3,450 HSA

401k comes out of my check pretax. the match isnt even part of my take home but i still get it. HSA is pretax but used on after tax basis for health expenses. brokerage is already after tax.

what are my savings rates as % of gross and net?
tmcc,

Why bother counting your saving rate based on income? If you count the saving rate based on either your current annual expense or retirement expense, it avoids all those problems.

Your goal is either Financially Independent or Retirement anyhow. Your targeted number is either based on current annual expense or retirement expense.

viewtopic.php?f=10&t=245447
<<KF Annual Expense Based Personal Finance Strategy>>

We have a detailed discussion of this method at the above thread.

KlangFool

tmcc
Posts: 143
Joined: Tue Feb 06, 2018 6:38 pm

Re: What’s the magic savings rate???

Post by tmcc » Mon Apr 02, 2018 6:49 am

KlangFool wrote:
Sun Apr 01, 2018 9:12 pm
tmcc wrote:
Sun Apr 01, 2018 8:07 pm
the ambiguity of savings rate percentages on different websites is very annoying.

how do you guys weigh the combined pre/post savings vehicles? historically, i have just considered it all "after tax" when assessing it vs net. the probablity that its all after tax in retirement is very high.

for example, lets say my I make $100,000/yr. we will assume no state tax. lets assume the combined federal tax rate is about 18%. this means my take home is $6,833 +/-.

$10,000 401k
$5,000 employer match
$10,000 brokerage
$3,450 HSA

401k comes out of my check pretax. the match isnt even part of my take home but i still get it. HSA is pretax but used on after tax basis for health expenses. brokerage is already after tax.

what are my savings rates as % of gross and net?
tmcc,

Why bother counting your saving rate based on income? If you count the saving rate based on either your current annual expense or retirement expense, it avoids all those problems.

Your goal is either Financially Independent or Retirement anyhow. Your targeted number is either based on current annual expense or retirement expense.

viewtopic.php?f=10&t=245447
<<KF Annual Expense Based Personal Finance Strategy>>

We have a detailed discussion of this method at the above thread.

KlangFool
Klang, that is a good thought, I like it. However, the one nagging thing about that is the unknown state of what FI will be.

KlangFool
Posts: 10201
Joined: Sat Oct 11, 2008 12:35 pm

Re: What’s the magic savings rate???

Post by KlangFool » Mon Apr 02, 2018 8:34 am

tmcc wrote:
Mon Apr 02, 2018 6:49 am
KlangFool wrote:
Sun Apr 01, 2018 9:12 pm
tmcc wrote:
Sun Apr 01, 2018 8:07 pm
the ambiguity of savings rate percentages on different websites is very annoying.

how do you guys weigh the combined pre/post savings vehicles? historically, i have just considered it all "after tax" when assessing it vs net. the probablity that its all after tax in retirement is very high.

for example, lets say my I make $100,000/yr. we will assume no state tax. lets assume the combined federal tax rate is about 18%. this means my take home is $6,833 +/-.

$10,000 401k
$5,000 employer match
$10,000 brokerage
$3,450 HSA

401k comes out of my check pretax. the match isnt even part of my take home but i still get it. HSA is pretax but used on after tax basis for health expenses. brokerage is already after tax.

what are my savings rates as % of gross and net?
tmcc,

Why bother counting your saving rate based on income? If you count the saving rate based on either your current annual expense or retirement expense, it avoids all those problems.

Your goal is either Financially Independent or Retirement anyhow. Your targeted number is either based on current annual expense or retirement expense.

viewtopic.php?f=10&t=245447
<<KF Annual Expense Based Personal Finance Strategy>>

We have a detailed discussion of this method at the above thread.

KlangFool
Klang, that is a good thought, I like it. However, the one nagging thing about that is the unknown state of what FI will be.
tmcc,

I do not understand what do you meant by that.

A) Age?

B) Expense?

KlangFool

User avatar
Portfolio7
Posts: 432
Joined: Tue Aug 02, 2016 3:53 am

Re: What’s the magic savings rate???

Post by Portfolio7 » Mon Apr 02, 2018 12:42 pm

tmcc wrote:
Sun Apr 01, 2018 8:07 pm
the ambiguity of savings rate percentages on different websites is very annoying.

how do you guys weigh the combined pre/post savings vehicles? historically, i have just considered it all "after tax" when assessing it vs net. the probablity that its all after tax in retirement is very high.

for example, lets say my I make $100,000/yr. we will assume no state tax. lets assume the combined federal tax rate is about 18%. this means my take home is $6,833 +/-.

$10,000 401k
$5,000 employer match
$10,000 brokerage
$3,450 HSA

401k comes out of my check pretax. the match isnt even part of my take home but i still get it. HSA is pretax but used on after tax basis for health expenses. brokerage is already after tax.

what are my savings rates as % of gross and net?
It's a rule of thumb, so I suggest you keep it simple: total savings / salary. That's what the recommendations are usually based on, that I could find. Thus, your savings percent is 28.45%. You might want to check out Portfoliocharts.com for charts that show the tradeoff between % of salary saved and time to FI, it's a great way to visually understand the trade-offs.

Klang Fool is right that if you want to be serious about it, use expenses as your base, and think about FI, not retirement. I wish I had. I'd have been more aggressive. I've been saving roughly 14% on average for 23 years (and some more in various non-retirement funds). If not for unique family medical costs and a pension that got decimated, I'd be FI about now. Instead I'm ten years from FI, when really I'm ready to step off the workerbee train tomorrow (I'd still work, but I'd find a lower stress job.)
An investment in knowledge pays the best interest.

User avatar
Garco
Posts: 703
Joined: Wed Jan 23, 2013 2:04 am

Re: What’s the magic savings rate???

Post by Garco » Mon Apr 02, 2018 1:04 pm

This discussion has interpreted "savings rate" as "retirement savings rate." I think a much broader definition is needed.

You should save for:

(1) retirement [general rule of thumb: minimum of 15% per year in 401k-type tax deferred funds]

(2) a home
[at minimum for down-payment but also to use cash to reduce mortgage size]

(3) college costs for children (invest in 529 plans)

(4) unanticipated contingencies (perhaps health related -- including HSA -- or family emergencies of one kind or another).

ThriftyPhD
Posts: 705
Joined: Mon Jul 31, 2017 10:43 am

Re: What’s the magic savings rate???

Post by ThriftyPhD » Mon Apr 02, 2018 1:36 pm

crockpotinvesting wrote:
Fri Mar 30, 2018 11:22 am
I’m trying to figure out the right retirement savings rate. Sometimes I feel like I’m not investing enough for the future and other times I feel like I’m missing out on things because I’m not spending enough presently.
Of course, the answer is that there is no magic savings rate. Everyone is different. Different personality, age, income, career trajectory, etc. What works for one will not work for the other.

What you are balancing is how much you spend now, when you want to retire, and how much you want available to spend when you retire. The more you save now, the earlier you can retire, AND/OR the more you have available to spend when you retire. If you save less now, you need to either delay retirement or cut spending in retirement.

Have you seen the "Good-Fast-Cheap: Pick Two" example?

Image

The idea is that you can't have all three, so you need to pick at most two.

Same thing here for savings. Replace Good-Fast-Cheap with Spend_Now-Retire_Early-Spend_Later. The difference is, you're not picking two, you're balancing all three.

How do you do this? Model a given savings rate, assume a conservative but realistic real (inflation adjusted) return, and see how much you will have at different years 10, 15, 20, 25, 30 years from now. Choose a spending rate in retirement (conservatively 3.5-4% depending how long you want it to last). Model it again with slightly different but realistic returns. Notice how saving more now will let you retire earlier, or have more in retirement to spend, or both.

So now, balance spending now vs later. If spending 90% of your salary now (including taxes) means you're saving 10% which would let you live off of 50% of your salary (inflation adjusted) in 45 years, that might not be realistic. In 45 years, you're going to be used to that higher standard of living and won't be happy with 50% of your current salary. In addition, it is optimistic to think that you will have the option to work for 45 years.

On the other end of the scale, if you try to retire in 10 years at 100% of current salary, your current standard of living might be so low that you won't be able to maintain that saving rate.

A few things to keep in mind. While we all hope that we will be fully employed and have a growing salary until the day we decide to retire, the reality is that you are likely to have gaps in employment. This would suggest saving a bit more than the above analysis would indicate, both to cover you in the gap years and to compensate for not saving during that time.

Also consider that the more you spend now, the more that you will become used to spending. This is a double hit. It reduces the amount you have to save, and also increases the amount you need to have before you can retire. This is why the MrMoneyMustache philosophy emphasizes saving a high percent. You get the double benefit of saving more and also needing less to maintain your current standard of living, therefore needing less saved before you're financially independent.

The downside to saving too much is that it can impact your current quality of life, causing you to give up on saving because it's too hard. You need to strike that balance of what you need to do to reach your goals, and what is comfortable now.

So much of this needs to be balanced for you, that it's really up to you to run the numbers and see what you're comfortable with.

BanquetBeer
Posts: 201
Joined: Thu Jul 13, 2017 5:57 pm

Re: What’s the magic savings rate???

Post by BanquetBeer » Mon Apr 02, 2018 1:58 pm

Wealth_Builder wrote:
Sun Apr 01, 2018 9:07 pm
- As other posters said, time is our biggest advantage - save now and the money will do the work in the long-run. Income you invest aggressively at 25 is worth 8X as income you invest at 46 (Rule of 72, 10% return, 7 years to double)
10% is a rosy assumption to begin with (100% stocks, average returns) but I would say you need to take out inflation because most people wouldn’t save $1 now vs $1 in 20 years, they would later save $1*inflation

So with a more realistic 6% return you are looking at 12 years to double. So $1 saved at 25 is worth $4*inflation saved at age 49. Assuming your wages and expenses keep pace with inflation that part can mostly be ignored.

Meaningful but unfortunate for us, not as significant.

tmcc
Posts: 143
Joined: Tue Feb 06, 2018 6:38 pm

Re: What’s the magic savings rate???

Post by tmcc » Mon Apr 02, 2018 4:12 pm

KlangFool wrote:
Mon Apr 02, 2018 8:34 am
tmcc wrote:
Mon Apr 02, 2018 6:49 am
KlangFool wrote:
Sun Apr 01, 2018 9:12 pm
tmcc wrote:
Sun Apr 01, 2018 8:07 pm
the ambiguity of savings rate percentages on different websites is very annoying.

how do you guys weigh the combined pre/post savings vehicles? historically, i have just considered it all "after tax" when assessing it vs net. the probablity that its all after tax in retirement is very high.

for example, lets say my I make $100,000/yr. we will assume no state tax. lets assume the combined federal tax rate is about 18%. this means my take home is $6,833 +/-.

$10,000 401k
$5,000 employer match
$10,000 brokerage
$3,450 HSA

401k comes out of my check pretax. the match isnt even part of my take home but i still get it. HSA is pretax but used on after tax basis for health expenses. brokerage is already after tax.

what are my savings rates as % of gross and net?
tmcc,

Why bother counting your saving rate based on income? If you count the saving rate based on either your current annual expense or retirement expense, it avoids all those problems.

Your goal is either Financially Independent or Retirement anyhow. Your targeted number is either based on current annual expense or retirement expense.

viewtopic.php?f=10&t=245447
<<KF Annual Expense Based Personal Finance Strategy>>

We have a detailed discussion of this method at the above thread.

KlangFool
Klang, that is a good thought, I like it. However, the one nagging thing about that is the unknown state of what FI will be.
tmcc,

I do not understand what do you meant by that.

A) Age?

B) Expense?

KlangFool
Klang, just reflecting on how I don't know for sure what my expenses will be when i achieve FI or retirement. I think my estimation is about as good as can be .. I'd just like to achieve a higher degree of confidence - I realize this is not possible. I just dont like it :mrgreen:

KlangFool
Posts: 10201
Joined: Sat Oct 11, 2008 12:35 pm

Re: What’s the magic savings rate???

Post by KlangFool » Mon Apr 02, 2018 4:48 pm

tmcc wrote:
Mon Apr 02, 2018 4:12 pm
KlangFool wrote:
Mon Apr 02, 2018 8:34 am
tmcc wrote:
Mon Apr 02, 2018 6:49 am
KlangFool wrote:
Sun Apr 01, 2018 9:12 pm
tmcc wrote:
Sun Apr 01, 2018 8:07 pm
the ambiguity of savings rate percentages on different websites is very annoying.

how do you guys weigh the combined pre/post savings vehicles? historically, i have just considered it all "after tax" when assessing it vs net. the probablity that its all after tax in retirement is very high.

for example, lets say my I make $100,000/yr. we will assume no state tax. lets assume the combined federal tax rate is about 18%. this means my take home is $6,833 +/-.

$10,000 401k
$5,000 employer match
$10,000 brokerage
$3,450 HSA

401k comes out of my check pretax. the match isnt even part of my take home but i still get it. HSA is pretax but used on after tax basis for health expenses. brokerage is already after tax.

what are my savings rates as % of gross and net?
tmcc,

Why bother counting your saving rate based on income? If you count the saving rate based on either your current annual expense or retirement expense, it avoids all those problems.

Your goal is either Financially Independent or Retirement anyhow. Your targeted number is either based on current annual expense or retirement expense.

viewtopic.php?f=10&t=245447
<<KF Annual Expense Based Personal Finance Strategy>>

We have a detailed discussion of this method at the above thread.

KlangFool
Klang, that is a good thought, I like it. However, the one nagging thing about that is the unknown state of what FI will be.
tmcc,

I do not understand what do you meant by that.

A) Age?

B) Expense?

KlangFool
Klang, just reflecting on how I don't know for sure what my expenses will be when i achieve FI or retirement. I think my estimation is about as good as can be .. I'd just like to achieve a higher degree of confidence - I realize this is not possible. I just dont like it :mrgreen:
tmcc,

<<just reflecting on how I don't know for sure what my expenses will be when i achieve FI or retirement. >>

1) The best estimate is your current annual expense.

2) I do "Pay Yourself First" saving method. My annual expense had stayed about the same over the last 10+ years. So, I am very confident in my ability to control my expense. So, I have no idea what do you mean by you do not know what your expense will be.

A) Do you know your current annual expense?

B) Do you track your annual expense over the past few years?

C) Do you use "Pay Yourself First" saving method?

KlangFool

User avatar
Cycle
Posts: 692
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Location: USA

Re: What’s the magic savings rate???

Post by Cycle » Mon Apr 02, 2018 6:43 pm

OP Your savings rate is pretty low for that income level, unless you have high recurring costs like a big mortgage, student loans, expensive car. Once you get rid of debt, it's pretty easy to achieve a high savings rate (w/o kids!). Your savings rate is fine if you don't want to be able to FIRE in your 30s.

At ~290k income, we are at 55-70% gross, 75-90% net taxes. Currently at 3% SAWR with 40k annual spend, age 34/35.

One car family, owner occupy a duplex, travel often but with miles and airbnb or tacked onto the tail of a work trip. Last year was South Africa, Denmark/Sweden, Ireland, Spain, Ecuador/Galapagos. We credit card churn for miles or sometimes travel spontaneously. Our tickets to Copenhagen were $320 RT from MPLS. We take megabus/greyhound sometimes. I recently had a posting on here about minimalism, which also enables a high savings rate viewtopic.php?t=242937

User avatar
rhinopylon
Posts: 56
Joined: Mon Apr 02, 2018 10:51 am

Re: What’s the magic savings rate???

Post by rhinopylon » Mon Apr 02, 2018 8:17 pm

I try to save 25% of gross. I include my employer 401k match as part of my savings.

Element
Posts: 6
Joined: Wed Sep 13, 2017 11:20 am

Re: What’s the magic savings rate???

Post by Element » Mon Apr 02, 2018 8:37 pm

This is a nice calculator to look at your situation:

http://networthify.com/calculator/early ... awalRate=4

Crisium
Posts: 149
Joined: Thu Dec 22, 2016 9:52 am

Re: What’s the magic savings rate???

Post by Crisium » Thu Apr 05, 2018 7:42 am

whomever wrote:
Fri Mar 30, 2018 1:39 pm
I worked with a group once that had a habit of morning and afternoon trips to Starbucks, at maybe $4 each trip, and a $10 lunch out. $18 a day times 20 working days a month is $360 a month.
The group next to me does this as well. I suspect it is not unusual.

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