Do people calculate savings rate on gross income?

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Ari
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Do people calculate savings rate on gross income?

Post by Ari » Mon Nov 05, 2018 11:30 am

In the FIRE thread I saw some people quoting numbers on savings rates and how it's impossible to save 75% if you pay 25% in tax. Is this the general way people express their savings rate? In terms of gross income? I've always assumed people were talking about net income.

My savings rate just dropped from ~70% to ~35%! :shock:

It makes zero sense to me to talk about savings in terms of gross income.
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PFInterest
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Re: Do people calculate savings rate on gross income?

Post by PFInterest » Mon Nov 05, 2018 11:33 am

gross makes more sense.

too many variables that change you to net.

FinancialDave
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Re: Do people calculate savings rate on gross income?

Post by FinancialDave » Mon Nov 05, 2018 11:40 am

PFInterest wrote:
Mon Nov 05, 2018 11:33 am
gross makes more sense.

too many variables that change you to net.
Agree, biggest variable being 401k tax-deferred deductions wouldn't even show up on the radar.

Also when you make a 401k deduction selection it is usually expressed in a percentage of your GROSS salary.

Pretty simple math.

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willthrill81
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Re: Do people calculate savings rate on gross income?

Post by willthrill81 » Mon Nov 05, 2018 11:41 am

We calculate ours based on gross income. We're currently at 54%.
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Re: Do people calculate savings rate on gross income?

Post by KlangFool » Mon Nov 05, 2018 11:46 am

OP,

I calculate my saving rate based on my current annual expense. I save 100% of my annual expense every year. It makes zero sense to calculate the saving rate based on income.

KlangFool

marcopolo
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Re: Do people calculate savings rate on gross income?

Post by marcopolo » Mon Nov 05, 2018 11:50 am

I used gross income plus my employer 401k matching in the denominator.
It also got added to the numerator, since i was saving all of it.
Once in a while you get shown the light, in the strangest of places if you look at it right.

MichCPA
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Re: Do people calculate savings rate on gross income?

Post by MichCPA » Mon Nov 05, 2018 11:55 am

Really you can do whatever you want. As Klang said, if you are looking to retire you might look at expenses. I can see points either way on gross vs net. If you were to look at gross, you are including some items you have less control over (insurance, taxes). If you look at net, you get a look at more discretionary items.

Looking at in through my corporate glasses, we have multiple margin calculations depending on what we are trying to look at. None of these are 'right' most of them are useful.

Most default to gross though.

Ari
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Re: Do people calculate savings rate on gross income?

Post by Ari » Mon Nov 05, 2018 12:07 pm

KlangFool wrote:
Mon Nov 05, 2018 11:46 am
I calculate my saving rate based on my current annual expense. I save 100% of my annual expense every year. It makes zero sense to calculate the saving rate based on income.
Isn't this the exact same thing as saying that you're saving 50% of net income?
All in, all the time.

jucor
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Re: Do people calculate savings rate on gross income?

Post by jucor » Mon Nov 05, 2018 12:12 pm

We calculate based on gross. In our case household gross in very low 6 figures, savings rate has been between 52% and 54% of gross for the past several years, approximately 1.75 times what we spend each year. LCOL area.

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TierArtz
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Re: Do people calculate savings rate on gross income?

Post by TierArtz » Mon Nov 05, 2018 12:13 pm

I save all I can without causing too much pain. My target percentage of gross is always met or exceeded, creeps up over time, and is presently 30% not counting employer 401(k) match.

Ari
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Re: Do people calculate savings rate on gross income?

Post by Ari » Mon Nov 05, 2018 12:17 pm

Huh, it's a bit of an "Aha" moment for me. I've been reading about people's savings rates for years and always assumed they meant net. Talking about it in terms of gross income makes zero sense to me. Two people with the same savings rate may have vastly different times required to retire. My savings rate is about 35% gross, but I'm saving 200% of expenses. Someone else might have a 50% savings rate (impossible for me, since my tax rate is 50%) but still take longer then me to get to 25X.
All in, all the time.

dcabler
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Re: Do people calculate savings rate on gross income?

Post by dcabler » Mon Nov 05, 2018 12:20 pm

I don't even target a % of gross or net at this point.
- I have a small range that I automatically deposit every month
- Additionally, any bonuses or RSU cash-outs go straight to savings. And that varies each year.
- And I also participate in the company's ESPP, so that goes in as well...

And while I don't target it, I do track it and I track it vs gross. But mostly because it's interesting - I don't actually do anything with the information.

Whakamole
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Re: Do people calculate savings rate on gross income?

Post by Whakamole » Mon Nov 05, 2018 12:26 pm

I use net. I don't have much control over taxes; I do have a lot of control over personal spending and (to a lesser extent) income.

CarpeDiem22
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Re: Do people calculate savings rate on gross income?

Post by CarpeDiem22 » Mon Nov 05, 2018 12:32 pm

I calculate saving % on net income (gross - tax). I include all my retirement savings in my savings rate.

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Re: Do people calculate savings rate on gross income?

Post by sailaway » Mon Nov 05, 2018 12:37 pm

I can tell you my savings rate in terms of AGI or expenses. Yes, I realize that AGI is odd, but it is a number that I have on hand once a year and I don't understand the obsession with savings rate. As long as you do it the same way year after year, the method just doesn't matter.

fulltilt
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Re: Do people calculate savings rate on gross income?

Post by fulltilt » Mon Nov 05, 2018 12:38 pm

Ari wrote:
Mon Nov 05, 2018 11:30 am
In the FIRE thread I saw some people quoting numbers on savings rates and how it's impossible to save 75% if you pay 25% in tax. Is this the general way people express their savings rate? In terms of gross income? I've always assumed people were talking about net income.

My savings rate just dropped from ~70% to ~35%! :shock:

It makes zero sense to me to talk about savings in terms of gross income.
I think in the FIRE community, savings rate tends to be kind of a contest. They tend to quote it as a percent of take home pay or a percent after taxes to make the number larger.

I don't think it matters which you choose to use as long as you're consistent.

magicrat
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Re: Do people calculate savings rate on gross income?

Post by magicrat » Mon Nov 05, 2018 12:44 pm

Since I will need to spend dollars in retirement, not percents, I calculate my savings in dollars, not percents.

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Re: Do people calculate savings rate on gross income?

Post by randomguy » Mon Nov 05, 2018 12:47 pm

Ari wrote:
Mon Nov 05, 2018 12:17 pm
Huh, it's a bit of an "Aha" moment for me. I've been reading about people's savings rates for years and always assumed they meant net. Talking about it in terms of gross income makes zero sense to me. Two people with the same savings rate may have vastly different times required to retire. My savings rate is about 35% gross, but I'm saving 200% of expenses. Someone else might have a 50% savings rate (impossible for me, since my tax rate is 50%) but still take longer then me to get to 25X.
Talking about net makes zero sense to me.

Compare these two people
a) 100k income, saves 25k pretax, pays 25k in taxes
Savings rate of 25/50 = 50%
b) 100k income saves 25k post tax, pays 25k in taxes
savings rate of 25/75 = 33%

B is saving more spendable money than A but has a lower savings rate. You think that makes more sense than just saying they both have a 25% savings rate?:) Savings rates are stupid numbers. There main purpose is to brag on the internet. Though now I realize that most people are saving half of what I thought it turns out bogleheads aren't really that frugal:) Figure out how much income you need in retirement and figure out if you are saving enough to meet the goal. Takes about 20s with any of a number of online calculators

Expenses suck cause you have to define an expense. That is one of the reasons the tax code is so long:). Are income taxes expenses? What about property taxes? Car taxes? And todays expenses are not tomorrows. I have 15k of healthcare that I can shift around to either count as an expense today or not. Doing that would change the numbers quite a bit but make zero difference in figuring out if I have enough money or not.

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mhc
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Re: Do people calculate savings rate on gross income?

Post by mhc » Mon Nov 05, 2018 1:10 pm

I use gross because I look at where it goes: taxes, spend, save. I do that because that is what is interesting to me.

FoolMeOnce
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Re: Do people calculate savings rate on gross income?

Post by FoolMeOnce » Mon Nov 05, 2018 1:14 pm

magicrat wrote:
Mon Nov 05, 2018 12:44 pm
Since I will need to spend dollars in retirement, not percents, I calculate my savings in dollars, not percents.
Percentages can help planning, because a savings rate implies a spending rate. The chart here may be overly simplistic, but it is a good start: http://www.mrmoneymustache.com/2012/01/ ... etirement/

The dollar numbers don't actually matter for this baseline calculation, which applies regardless if income.

This would of course need to be personalized based on expected changes to expenses during retirement, and those tweaks might be easier in dollars rather than percentages.

Whakamole
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Re: Do people calculate savings rate on gross income?

Post by Whakamole » Mon Nov 05, 2018 1:23 pm

randomguy wrote:
Mon Nov 05, 2018 12:47 pm
Talking about net makes zero sense to me.

Compare these two people
a) 100k income, saves 25k pretax, pays 25k in taxes
Savings rate of 25/50 = 50%
b) 100k income saves 25k post tax, pays 25k in taxes
savings rate of 25/75 = 33%
I don't think that's net. Net would have them be exactly the same.

100K income, 25K paid in taxes means 75K left over. 25K is 33% of that, no matter the savings vehicle.

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goingup
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Re: Do people calculate savings rate on gross income?

Post by goingup » Mon Nov 05, 2018 1:48 pm

It makes sense to use % rate of gross income because most people save pre-tax in a 401K, and this is their biggest savings vehicle.

I'd rather keep track of how many $$ are saved per year. I've set a target each January for the last 20 years. Most years we get there.

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Re: Do people calculate savings rate on gross income?

Post by KlangFool » Mon Nov 05, 2018 1:52 pm

Ari wrote:
Mon Nov 05, 2018 12:07 pm
KlangFool wrote:
Mon Nov 05, 2018 11:46 am
I calculate my saving rate based on my current annual expense. I save 100% of my annual expense every year. It makes zero sense to calculate the saving rate based on income.
Isn't this the exact same thing as saying that you're saving 50% of net income?
No. It is hard to calculate net income. And, everyone has a different definition of net income.

In this system, it is simple.

Gross income = Annual Expense + Taxes+ Savings.

All you need is your payslips to calculate all your taxes.

KlangFool

KlangFool
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Re: Do people calculate savings rate on gross income?

Post by KlangFool » Mon Nov 05, 2018 2:01 pm

Ari wrote:
Mon Nov 05, 2018 12:17 pm
Huh, it's a bit of an "Aha" moment for me. I've been reading about people's savings rates for years and always assumed they meant net. Talking about it in terms of gross income makes zero sense to me. Two people with the same savings rate may have vastly different times required to retire. My savings rate is about 35% gross, but I'm saving 200% of expenses. Someone else might have a 50% savings rate (impossible for me, since my tax rate is 50%) but still take longer then me to get to 25X.
Ari,

Your number may not be correct if the expense in this case equal to current annual expense.

Gross income = Saving + expense + taxes

If S= 2 X E = 35% of gross income, E = 35% /2 = 17.5% of gross income.

Taxes = 100% (gross income) - 35% (savings) - 17.5% (expense) = 47.5% of gross income.


KlangFool

MathWizard
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Re: Do people calculate savings rate on gross income?

Post by MathWizard » Mon Nov 05, 2018 2:04 pm

If I calculate what my savings rate is, the denominator is
(gross wages + employer tax deferred match)

It really doesn't matter though, because I just determine what
I need to save, using conservative assumptions, and save that.

FoolMeOnce
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Re: Do people calculate savings rate on gross income?

Post by FoolMeOnce » Mon Nov 05, 2018 2:09 pm

KlangFool wrote:
Mon Nov 05, 2018 1:52 pm
Ari wrote:
Mon Nov 05, 2018 12:07 pm
KlangFool wrote:
Mon Nov 05, 2018 11:46 am
I calculate my saving rate based on my current annual expense. I save 100% of my annual expense every year. It makes zero sense to calculate the saving rate based on income.
Isn't this the exact same thing as saying that you're saving 50% of net income?
No. It is hard to calculate net income. And, everyone has a different definition of net income.

In this system, it is simple.

Gross income = Annual Expense + Taxes+ Savings.

All you need is your payslips to calculate all your taxes.

KlangFool
But it's 50% of gross, right? Save a year of expenses, spend a year of expenses (taxes included).

You have said elsewhere that you are cash-flowing college, right? So do you include that in your "current annual expense," or do you exempt discreet, non-perpetual expenses from your calculation? Just curious.

OP, it really doesn't matter. If your number is 35% because you calculate on gross while someone else is 70% of net, who cares? Gross makes sense because you need to include taxes in you retirement spending forecasts. Net makes sense (so long as you included tax-deferred savings in net) because your taxes will be different in retirement. Or save X% of current spending or expected retirement spending. Regardless, you'll need to account for taxes. Pick an aggressive target, stick to it, and try to increase it, all while still allowing yourself to enjoy present goals as well.

LiterallyIronic
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Re: Do people calculate savings rate on gross income?

Post by LiterallyIronic » Mon Nov 05, 2018 2:15 pm

I use gross. I don't even know what my net income is. Is "net income" gross minus taxes? Gross minus taxes minus pre-tax health insurance premiums? What about pre-tax HSA contributions? What if I get a tax refund or owe more taxes in April? Then my "net" was wrong the whole year? Too complicated.

It's easy to just add up the amounts going to our Roth IRAs and my 401k and divide that by my gross income to determine that I save 25% of gross. I don't include employer contributions or mortgage principal prepayment as "saving".

KlangFool
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Re: Do people calculate savings rate on gross income?

Post by KlangFool » Mon Nov 05, 2018 2:24 pm

FoolMeOnce wrote:
Mon Nov 05, 2018 2:09 pm
KlangFool wrote:
Mon Nov 05, 2018 1:52 pm
Ari wrote:
Mon Nov 05, 2018 12:07 pm
KlangFool wrote:
Mon Nov 05, 2018 11:46 am
I calculate my saving rate based on my current annual expense. I save 100% of my annual expense every year. It makes zero sense to calculate the saving rate based on income.
Isn't this the exact same thing as saying that you're saving 50% of net income?
No. It is hard to calculate net income. And, everyone has a different definition of net income.

In this system, it is simple.

Gross income = Annual Expense + Taxes+ Savings.

All you need is your payslips to calculate all your taxes.

KlangFool
But it's 50% of gross, right? Save a year of expenses, spend a year of expenses (taxes included).

You have said elsewhere that you are cash-flowing college, right? So do you include that in your "current annual expense," or do you exempt discreet, non-perpetual expenses from your calculation? Just curious.

OP, it really doesn't matter. If your number is 35% because you calculate on gross while someone else is 70% of net, who cares? Gross makes sense because you need to include taxes in you retirement spending forecasts. Net makes sense (so long as you included tax-deferred savings in net) because your taxes will be different in retirement. Or save X% of current spending or expected retirement spending. Regardless, you'll need to account for taxes. Pick an aggressive target, stick to it, and try to increase it, all while still allowing yourself to enjoy present goals as well.
FoolMeOnce,

1) It is not 50% of gross income. The taxes include social security, Medicare, state, federal. So, it is about 20% or more. It is probably around 30% to 40% of gross income.

2) My expense does not include taxes.

3) If I include college expenses, I save nothing.

KlangFool
Last edited by KlangFool on Mon Nov 05, 2018 2:25 pm, edited 1 time in total.

randomguy
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Re: Do people calculate savings rate on gross income?

Post by randomguy » Mon Nov 05, 2018 2:25 pm

Whakamole wrote:
Mon Nov 05, 2018 1:23 pm
randomguy wrote:
Mon Nov 05, 2018 12:47 pm
Talking about net makes zero sense to me.

Compare these two people
a) 100k income, saves 25k pretax, pays 25k in taxes
Savings rate of 25/50 = 50%
b) 100k income saves 25k post tax, pays 25k in taxes
savings rate of 25/75 = 33%
I don't think that's net. Net would have them be exactly the same.

100K income, 25K paid in taxes means 75K left over. 25K is 33% of that, no matter the savings vehicle.
Net is what I take home. Gross is what I earn. There is a reason why the tax code is so long. It isn't about tax brackets. it is defining all these type of terms;) When someone tells you they have a 50% savings rate, you know almost nothing. You need a lot more info in how that number is calculated. Think about the stuff that we can debate
a) How do you account for a employer match
b) health care premiums
c) mortgage payments on principle
d) taxes

None of these choices is really right or wrong. But it makes it impossible for me to say if you 25% is higher or lower than my 50%.

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Re: Do people calculate savings rate on gross income?

Post by Darth Xanadu » Mon Nov 05, 2018 2:31 pm

marcopolo wrote:
Mon Nov 05, 2018 11:50 am
I used gross income plus my employer 401k matching in the denominator.
It also got added to the numerator, since i was saving all of it.
I like this approach. If I ever decided to calculate mine, this is the method I would use.
"A courageous teacher, failure is."

UpperNwGuy
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Re: Do people calculate savings rate on gross income?

Post by UpperNwGuy » Mon Nov 05, 2018 2:40 pm

I would use gross income if I wanted to calculate my savings rate; however, I don't ever calculate it, as it's a meaningless number to me. By the way, I don't even know what my net income is. it certainly is not "what I take home."

Seems like this is a question that should be addressed to an internet FIRE forum rather than to this group.

Whakamole
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Re: Do people calculate savings rate on gross income?

Post by Whakamole » Mon Nov 05, 2018 3:19 pm

randomguy wrote:
Mon Nov 05, 2018 2:25 pm
Whakamole wrote:
Mon Nov 05, 2018 1:23 pm
randomguy wrote:
Mon Nov 05, 2018 12:47 pm
Talking about net makes zero sense to me.

Compare these two people
a) 100k income, saves 25k pretax, pays 25k in taxes
Savings rate of 25/50 = 50%
b) 100k income saves 25k post tax, pays 25k in taxes
savings rate of 25/75 = 33%
I don't think that's net. Net would have them be exactly the same.

100K income, 25K paid in taxes means 75K left over. 25K is 33% of that, no matter the savings vehicle.
Net is what I take home. Gross is what I earn. There is a reason why the tax code is so long. It isn't about tax brackets. it is defining all these type of terms;) When someone tells you they have a 50% savings rate, you know almost nothing. You need a lot more info in how that number is calculated. Think about the stuff that we can debate
a) How do you account for a employer match
b) health care premiums
c) mortgage payments on principle
d) taxes

None of these choices is really right or wrong. But it makes it impossible for me to say if you 25% is higher or lower than my 50%.
Gross is equally flawed then because 25% could be more or less depending on how much money each of us made.

randomguy
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Re: Do people calculate savings rate on gross income?

Post by randomguy » Mon Nov 05, 2018 3:30 pm

Whakamole wrote:
Mon Nov 05, 2018 3:19 pm
randomguy wrote:
Mon Nov 05, 2018 2:25 pm
Whakamole wrote:
Mon Nov 05, 2018 1:23 pm
randomguy wrote:
Mon Nov 05, 2018 12:47 pm
Talking about net makes zero sense to me.

Compare these two people
a) 100k income, saves 25k pretax, pays 25k in taxes
Savings rate of 25/50 = 50%
b) 100k income saves 25k post tax, pays 25k in taxes
savings rate of 25/75 = 33%
I don't think that's net. Net would have them be exactly the same.

100K income, 25K paid in taxes means 75K left over. 25K is 33% of that, no matter the savings vehicle.
Net is what I take home. Gross is what I earn. There is a reason why the tax code is so long. It isn't about tax brackets. it is defining all these type of terms;) When someone tells you they have a 50% savings rate, you know almost nothing. You need a lot more info in how that number is calculated. Think about the stuff that we can debate
a) How do you account for a employer match
b) health care premiums
c) mortgage payments on principle
d) taxes

None of these choices is really right or wrong. But it makes it impossible for me to say if you 25% is higher or lower than my 50%.
Gross is equally flawed then because 25% could be more or less depending on how much money each of us made.
Just because net makes zero sense doesn't mean that gross is any better.:) You need a lot more context to know anything. As someone pointed out this is mainly just an internet bragging number. Do whatever makes you feel good.
r
Want to know when you can retire? Put the numbers into a calculator and see when your networth tells you that you can. Simple and a lot more accurate.

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Re: Do people calculate savings rate on gross income?

Post by bgf » Mon Nov 05, 2018 3:30 pm

the answer to this question depends on your purpose in calculating it. if you are calculating it for comparative purposes, it seems like using gross is the most expedient.

personally, i don't care how much other people save, especially when they are using their gross income as that amount. a single person with no dependents who makes $600k a year, lives off the grid in a tiny house, and saves 90% of his income could not be more irrelevant to me. i just do not care. i care about how much WE are saving. furthermore, i want our savings rate to show us how much money that could be spent otherwise is saved. i cannot save money owed in taxes. it must be used to pay taxes. i have no discretion there.

pretty much everything else can be discretionary, even my mortgage payment. there is a law that says i have to pay my taxes; there is no law that i have to have a mortgage payment, or a car payment, etc.

so i use our net income after taxes to calculate our savings rate. i find this to give me the information i care about.

also, i do like Klangfool's method of savings compared to expenses. that is what matters to him and so that is how he calculates it. makes sense to me.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

H-Town
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Re: Do people calculate savings rate on gross income?

Post by H-Town » Mon Nov 05, 2018 3:48 pm

Ari wrote:
Mon Nov 05, 2018 11:30 am
In the FIRE thread I saw some people quoting numbers on savings rates and how it's impossible to save 75% if you pay 25% in tax. Is this the general way people express their savings rate? In terms of gross income? I've always assumed people were talking about net income.

My savings rate just dropped from ~70% to ~35%! :shock:

It makes zero sense to me to talk about savings in terms of gross income.
Use the metrics that makes sense to you and use it consistently. It's not a contest when it comes to saving rate.

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UpsetRaptor
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Re: Do people calculate savings rate on gross income?

Post by UpsetRaptor » Mon Nov 05, 2018 4:06 pm

If it's calculated based on net income instead of gross income, then our savings rate is going to be 0% forever, despite contributing to a 401k, Roth 403b, a 457, and a pension.

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Re: Do people calculate savings rate on gross income?

Post by Whakamole » Mon Nov 05, 2018 4:13 pm

randomguy wrote:
Mon Nov 05, 2018 3:30 pm
Just because net makes zero sense doesn't mean that gross is any better.:) You need a lot more context to know anything. As someone pointed out this is mainly just an internet bragging number. Do whatever makes you feel good.
r
Want to know when you can retire? Put the numbers into a calculator and see when your networth tells you that you can. Simple and a lot more accurate.
I agree if you are looking at comparing one person to another.

I think net works if you are comparing yourself to yourself - meaning it shows how much you are saving and spending compared to last year or some other time period. If I manage to cut my food budget by $50 or $100 (fewer meals out, eating less meat), that will have a greater impact on a net-based savings rate than a gross-based rate.

I don't think it works on a daily/monthly basis for the reasons you already stated (shifting revenues/expenses around), and I agree completely that any "savings rate" is worthless when comparing one person to another in isolation.

smitcat
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Re: Do people calculate savings rate on gross income?

Post by smitcat » Mon Nov 05, 2018 4:17 pm

UpsetRaptor wrote:
Mon Nov 05, 2018 4:06 pm
If it's calculated based on net income instead of gross income, then our savings rate is going to be 0% forever, despite contributing to a 401k, Roth 403b, a 457, and a pension.
That is too funny and very accurate - congratulations you are well on your way (even with "no savings")

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Re: Do people calculate savings rate on gross income?

Post by mbasherp » Mon Nov 05, 2018 4:47 pm

I used to think that net was the way to go, but I’ve changed my mind. Calculating by gross is less cloudy and I’m less likely to have false confidence about a really high number.

I used to pat myself on the back for hitting 50% of net. But we’re around 33% gross and that keeps me wanting to improve things.

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corn18
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Re: Do people calculate savings rate on gross income?

Post by corn18 » Mon Nov 05, 2018 7:54 pm

I can calculate it 9 ways to Sunday and none of it means anything to me. I need $2M in the bank with a paid off house and then I can retire. I'm 52 so maybe I would care about % savings at 22. I'm old enough to not have to care.

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Re: Do people calculate savings rate on gross income?

Post by kevinpet » Mon Nov 05, 2018 9:15 pm

I calculate on takehome + retirement deductions. What matters to me is the ratio of savings to spending, and calculating this way makes that easily apparent, while calculating on gross means I need to calculate two numbers to make that easily apparent, and that would mean I need to enter pretty much every line of my paystubs.

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teen persuasion
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Re: Do people calculate savings rate on gross income?

Post by teen persuasion » Mon Nov 05, 2018 9:55 pm

FoolMeOnce wrote:
Mon Nov 05, 2018 1:14 pm
magicrat wrote:
Mon Nov 05, 2018 12:44 pm
Since I will need to spend dollars in retirement, not percents, I calculate my savings in dollars, not percents.
Percentages can help planning, because a savings rate implies a spending rate. The chart here may be overly simplistic, but it is a good start: http://www.mrmoneymustache.com/2012/01/ ... etirement/

The dollar numbers don't actually matter for this baseline calculation, which applies regardless if income.

This would of course need to be personalized based on expected changes to expenses during retirement, and those tweaks might be easier in dollars rather than percentages.
From the link:

Your savings rate, as a percentage of your take-home pay

If you want to break it down just a bit further, your savings rate is determined entirely by these two things:

How much you take home each year

How much you can live on

** definition of take-home pay: gross income minus all taxes. Remember to add back in any 401k or other savings deductions to the paycheck you see, since these are really part of what you are “taking home” – you just happen to be saving it automatically.
When I initially read this, I balked at "take-home", because most people define take-home as what is deposited in their checking. But MMM is correct, you should also include amounts deposited to HSA and retirement accounts.

Then there's the issue of taxes - for us, taxes are a net gain, now. We pay FICA, but receive larger refundable credits, both state and federal. So what is gross for us? W2 income, W2 + tax refunds, W2 + net tax gain?

I think FIRE boards tend to leave taxes out of the calculations because taxes can vary so much for individual situations, and FICA should go away after retirement, and FIREes expect much lower taxes on their optimized retirement income streams. But taxes ARE an expense, and need to be accounted for.

I'm not really interested in comparisons to other people; I am interested in using the chart on MMM to gauge time to FIRE at present savings rate, or using it to target a desired savings rate to reach FIRE in X years. So net it is for me.

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Re: Do people calculate savings rate on gross income?

Post by CarpeDiem22 » Mon Nov 05, 2018 10:09 pm

I think it makes more sense to use net (as defined by MMM, gross - taxes) because the whole idea is to understand saving and spending. Whatever I spend, I don't save and vice versa. It not just mathematical but also psychological I feel. If I use gross, I can keep blaming the govt and taxes for reducing my savings rather than taking a look at my own spending. The simplicity of concepts at MMM is what makes him really popular.

Fm2018
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Re: Do people calculate savings rate on gross income?

Post by Fm2018 » Mon Nov 05, 2018 10:19 pm

Consumption now + consumption later (i.e., savings including 401k match) + Taxes =Total (including company 401k match).

So,

Saving rate = consumption later (i.e., savings including 401k match) ÷ Total (including company 401k match).

It is that simple.

additional note: save enough to reach above 25x expenses if you want to be FI in your 60s. Less if in your 70s. More if in your 50s.

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Re: Do people calculate savings rate on gross income?

Post by randomguy » Mon Nov 05, 2018 10:40 pm

Whakamole wrote:
Mon Nov 05, 2018 4:13 pm
randomguy wrote:
Mon Nov 05, 2018 3:30 pm
Just because net makes zero sense doesn't mean that gross is any better.:) You need a lot more context to know anything. As someone pointed out this is mainly just an internet bragging number. Do whatever makes you feel good.
r
Want to know when you can retire? Put the numbers into a calculator and see when your networth tells you that you can. Simple and a lot more accurate.
I agree if you are looking at comparing one person to another.

I think net works if you are comparing yourself to yourself - meaning it shows how much you are saving and spending compared to last year or some other time period. If I manage to cut my food budget by $50 or $100 (fewer meals out, eating less meat), that will have a greater impact on a net-based savings rate than a gross-based rate.

I don't think it works on a daily/monthly basis for the reasons you already stated (shifting revenues/expenses around), and I agree completely that any "savings rate" is worthless when comparing one person to another in isolation.
Here is a simple question. If you cut your spending by 100 dollars, does your retirement date change at all if you use net or gross savings rate?

MathIsMyWayr
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Re: Do people calculate savings rate on gross income?

Post by MathIsMyWayr » Mon Nov 05, 2018 11:46 pm

Savings rate is meaningless by itself and nobody should be fixated by it. According to a popular recommendation, if you save at least 15% of income over your entire working life, you may be able to maintain your current life style during retirement. This is a rough guideline. Of course, the higher, the better. For example, if you save 15% of your income at the rate of return of 6.5%, you will end up with about 19x after 35 years, FV(6.5%,35,-0.15)=19. If your social security meets 25% of your expense, your number may be more than 25x. You should review your financial status occasionally and tweak the number if necessary.

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Re: Do people calculate savings rate on gross income?

Post by madbrain » Tue Nov 06, 2018 12:14 am

KlangFool wrote:
Mon Nov 05, 2018 2:24 pm
1) It is not 50% of gross income. The taxes include social security, Medicare, state, federal. So, it is about 20% or more. It is probably around 30% to 40% of gross income.

2) My expense does not include taxes.

3) If I include college expenses, I save nothing.

KlangFool
Well, that's certainly a convenient way to calculate your savings rate - exclude your biggest expenses from the "expense" category. Then your savings will look really huge !

IMO, taxes are an expense. They are not savings, and they are not income. Taxes are just a subset of expenses. I don't know how to view them any other way. I consider taxes to be my biggest expense.
Don't have college expenses, but if you are talking about money that's currently being spent, I would count those as expenses too.

I always compute my savings rate as a percentage of gross income. It looks relatively small as a result for Bogleheads, typically in the 15 to 20% range, even though the raw savings figure is actually a pretty big number.

The gross income itself is a bit of a moving target, though. For example, my previous employer would include the value of benefits in each paystub, and then deduct the employer share of benefits as part of deductions.
My current employer doesn't do that. Benefits are not listed in the top line, or deducted.

As a result, my "expenses" have significantly diminished . My "income" would have diminished to if my new employer was paying me the same - fortunately, that is not the case (they are paying more).

I think I could still get the number at the end of the year on the W-2 and add it back to gross, and then deduct it. But that still doesn't include all employer benefits, only for health. Not sure if dental, vision, life insurance, etc. are all included in box 12D.

If I was using your computation method, and excluding taxes from my expense, my savings rate would probably be in the range of 40 to 50% of annual expenses.

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Re: Do people calculate savings rate on gross income?

Post by Ari » Tue Nov 06, 2018 1:56 am

I guess I just underestimated how complicated things are in the US. It didn't occurr to me that there could be different ways of calculating net income. To me it's just salary minus taxes, which is equal to what is deposited in my account each month.

And of course it doesn't really matter what savings rate other people have, but you still see it a lot in internet discussions of personal finance, so it was interesting to know that the mental model I've been working with is wrong.

I think I'll keep on using net for my personal calculations. Using gross is too depressing! Thanks, everyone.
All in, all the time.

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Re: Do people calculate savings rate on gross income?

Post by tmcc » Tue Nov 06, 2018 6:41 am

net and gross change all the time but bills are relatively constant. % of expenses is the most apples to apples method of measuring savings.

adjusting the expense lines for non-recurring expenses is normal. ie, if you're approaching FIRE and part of your cash flow calc includes paying off your house, you would not include your prin+intr mortgage payment in your future expense expectations.

if there is a downturn and you become underemployed, your savings rate could be the same because you've benchmarked your savings goal against a target that doesn't move. if you use gross or net, you are not using the same basis for the measurement.

its pretty straight forward.

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Tamarind
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Re: Do people calculate savings rate on gross income?

Post by Tamarind » Tue Nov 06, 2018 6:51 am

Gross makes more sense to me because then I have apples-to-apples for how much goes to savings, taxes, and spending. If you use net, it seems to imply that the tax portion is out of your hands, which it isn't.

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