Savings rate: gross or net?

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mikeguima
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Savings rate: gross or net?

Post by mikeguima » Fri Jul 28, 2017 5:59 am

Hey everyone!

I posted this in the other thread about each one's personall savings rate but since it was a relatively different subject, I'll (re)post the question here:
"
Save 10% and you'll be fine
Save 20% and you'll thrive
Save 30% and you'll be wealthy
Sounds awesome! :D

One major doubt I have is if most recommended savings rate are in function of gross income or after-tax income. In the Bogleheads book it has an example of at least 10% of take-home pay (which I assume is after tax, right?); in "If You Can" by Dr. Bernstein it says 15% of income, which I then assume is gross income.

In Tony Robbin's book, it says this: "If you’re looking for guidance on this, experts say you should plan to save at least a minimum of 10% of your income, although in today’s economy many agree 15% is a far better number, especially if you’re over the age of 40".

These 10% are over gross or net income? I can't figure that out, everybody uses different reference points for salary.

What do you guys think?
EDIT: This article by investopedia claims it's computed over net income: http://www.investopedia.com/terms/s/savings-rate.asp
These savings rates published by OECD by country are net savings, which I assume they're also after tax: http://stats.oecd.org/Index.aspx?QueryId=51648"

Thanks!

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bottlecap
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Re: Savings rate: gross or net?

Post by bottlecap » Fri Jul 28, 2017 6:02 am

You are far better figuring this out yourself.

Decide what you will need to retire and work backwards from there.

If you want someone else to decide it for you, I say "net" and "Don't listen to Tony Robbins."

JT

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CyclingDuo
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Re: Savings rate: gross or net?

Post by CyclingDuo » Fri Jul 28, 2017 6:10 am

mikeguima wrote:Hey everyone!

I posted this in the other thread about each one's personall savings rate but since it was a relatively different subject, I'll (re)post the question here:
"
Save 10% and you'll be fine
Save 20% and you'll thrive
Save 30% and you'll be wealthy
Sounds awesome! :D

One major doubt I have is if most recommended savings rate are in function of gross income or after-tax income. In the Bogleheads book it has an example of at least 10% of take-home pay (which I assume is after tax, right?); in "If You Can" by Dr. Bernstein it says 15% of income, which I then assume is gross income.

In Tony Robbin's book, it says this: "If you’re looking for guidance on this, experts say you should plan to save at least a minimum of 10% of your income, although in today’s economy many agree 15% is a far better number, especially if you’re over the age of 40".

These 10% are over gross or net income? I can't figure that out, everybody uses different reference points for salary.

What do you guys think?
EDIT: This article by investopedia claims it's computed over net income: http://www.investopedia.com/terms/s/savings-rate.asp
These savings rates published by OECD by country are net savings, which I assume they're also after tax: http://stats.oecd.org/Index.aspx?QueryId=51648"

Thanks!
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smitcat
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Re: Savings rate: gross or net?

Post by smitcat » Fri Jul 28, 2017 6:11 am

bottlecap wrote:You are far better figuring this out yourself.

Decide what you will need to retire and work backwards from there.

If you want someone else to decide it for you, I say "net" and "Don't listen to Tony Robbins."

JT
I could not agree more - any other 'comparisons' with others are just misleading and a waste of time.

The Wizard
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Re: Savings rate: gross or net?

Post by The Wizard » Fri Jul 28, 2017 6:18 am

I used gross income in the denominator.
Enhanced gross income, actually, so that if my salary was $100,000 and my employer contributed a $5000 "match" to my 403(b), then I used $105,000 in the denominator.

My numerator included all long term savings including the match. It certainly did not include any short term savings or mortgage principal payments...
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TomatoTomahto
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Re: Savings rate: gross or net?

Post by TomatoTomahto » Fri Jul 28, 2017 6:23 am

I can't save what I never had, so basing it on gross seems counter-intuitive.

Spend a reasonable amount, save the rest. That works for us.
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bottlecap
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Re: Savings rate: gross or net?

Post by bottlecap » Fri Jul 28, 2017 6:51 am

TomatoTomahto wrote:I can't save what I never had, so basing it on gross seems counter-intuitive.
Excellent point.

It's a reminder, OP, that you have to account for some taxes, as well. You can't spend what you never have in retirement.

JT

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Re: Savings rate: gross or net?

Post by The Wizard » Fri Jul 28, 2017 7:11 am

TomatoTomahto wrote:I can't save what I never had, so basing it on gross seems counter-intuitive...
I'm not sure it's counter intuitive.
I think gross income analysis is a more comprehensive way of looking at your finances.

I had things coming out of gross pay like:
Federal income tax
State income tax
FICA
Health insurance
Dental insurance
403(b) contributions
Parking
and so forth.

Understanding where your gross pay goes and how it might change in retirement is important.

The only reason I can see for using some version of net pay to use compute your savings rate is to make the percentage number bigger for the same dollar amount.
But we're not having a contest, so that doesn't matter...
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TomatoTomahto
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Re: Savings rate: gross or net?

Post by TomatoTomahto » Fri Jul 28, 2017 7:23 am

The Wizard wrote:
TomatoTomahto wrote:I can't save what I never had, so basing it on gross seems counter-intuitive...
I'm not sure it's counter intuitive.
I think gross income analysis is a more comprehensive way of looking at your finances.

I had things coming out of gross pay like:
Federal income tax
State income tax
FICA
Health insurance
Dental insurance
403(b) contributions
Parking
and so forth.

Understanding where your gross pay goes and how it might change in retirement is important.

The only reason I can see for using some version of net pay to use compute your savings rate is to make the percentage number bigger for the same dollar amount.
But we're not having a contest, so that doesn't matter...
I take your point, but if the top 3 in your list approach 50%, and there's not much I can do about it (short of moving or quitting), I'm not sure what purpose is served, other than the reverse of what you said: making the percentage number smaller for the same dollar amount.

Way back when, I had to assure employees that working overtime or getting promoted would not reduce their pay, even though they might go up a tax band. I think there's a danger, as someone moves up, in getting discouraged by the declining savings percentage, so I don't favor it. In the end, your bank wants dollars, not percentages. But, to each their own.
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nolesrule
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Re: Savings rate: gross or net?

Post by nolesrule » Fri Jul 28, 2017 7:48 am

I really dislike the suggestion of using takehome pay. It assumes that taxes withheld = tax liability.

So the problem in these discussions always comes down to people using different denominators in the math. There are so many variables that in that regard that it defeats the purpose of the discussion.

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Re: Savings rate: gross or net?

Post by Iliketoridemybike » Fri Jul 28, 2017 7:53 am

The answer for me is two numbers: one gross, one net. I have 401k money come out pretax, so that is off the gross. All my after tax savings is net, or what your take home check says. So you can't have just a single number. So I end up at about 50% of gross, 70% of net.

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Re: Savings rate: gross or net?

Post by KlangFool » Fri Jul 28, 2017 7:55 am

mikeguima wrote:Hey everyone!

I posted this in the other thread about each one's personall savings rate but since it was a relatively different subject, I'll (re)post the question here:
"
Save 10% and you'll be fine
Save 20% and you'll thrive
Save 30% and you'll be wealthy
Sounds awesome! :D

Thanks!
mikeguima,

The question could be answered easily if you convert the number into the percentage of current annual expense.

It is very simple. It cannot be over the net income.

Let's assume that it is the net income.

A) If you save 10% of the net income, it meant that you spend 90% of the net income. Your savings as a percentage of the annual expense = 10%/90% = 0.11 = 11% of current annual expense.

As per standard personal finance rule, a person should have 3 to 6 months of the emergency fund before start investing.

3 months of emergency fund = 3/12 = 25% of annual expense.

6 months of emergency fund = 6/12 = 50% of annual expense.

With 11% of saving per annual expense every year, the person would need 2+ years to save 3 months of emergency fund. And, 4+ years to save 50% of the emergency fund.

Let's assume ROI of 6%.

Starting Net Worth $0
Annual Savings 11%
Years
Annual Return Rate 5 10 15 20 25 30 35 40 45
5.00% 61% 138% 237% 364% 525% 731% 994% 1329% 1757%
6.00% 62% 145% 256% 405% 604% 870% 1226% 1702% 2340%
7.00% 63% 152% 276% 451% 696% 1039% 1521% 2196% 3143%
8.00% 65% 159% 299% 503% 804% 1246% 1895% 2850% 4252%
9.00% 66% 167% 323% 563% 932% 1499% 2373% 3717% 5784%

So, it works if you assume that this person has a perfect job security. He/she can survive multiple recessions without job security. And, there are zero financial emergencies across 45 years that impact his/her saving and investment.

<<Save 10% and you'll be fine>>

This statement is false if it is over the net income. It assumes a level of job security that most folks do not get.

<<Save 30% and you'll be wealthy>>

B) Let's do the same analysis with this statement. 30% saving over net income = spend 70% of net income. Saving per annual expense = 30/70 = 43%

Starting Net Worth $0
Annual Savings 43%
Years
Annual Return Rate 5 10 15 20 25 30 35 40 45
5.00% 238% 541% 928% 1422% 2052% 2857% 3884% 5194% 6867%
6.00% 242% 567% 1001% 1582% 2359% 3400% 4792% 6655% 9148%
7.00% 247% 594% 1081% 1763% 2720% 4062% 5944% 8584% 12287%
8.00% 252% 623% 1168% 1968% 3144% 4871% 7410% 11139% 16620%
9.00% 257% 653% 1263% 2200% 3642% 5861% 9276% 14529% 22612%

You need about 25 years to reach 25 times annual expense. So, this is doable.

But, if it is 30% saving over gross income, you will be saving close to 100% of your annual expense.

Starting Net Worth $0
Annual Savings 100%
Years
Annual Return Rate 5 10 15 20 25 30 35 40 45
5.00% 553% 1258% 2158% 3307% 4773% 6644% 9032% 12080% 15970%
6.00% 564% 1318% 2328% 3679% 5486% 7906% 11143% 15476% 21274%
7.00% 575% 1382% 2513% 4100% 6325% 9446% 13824% 19964% 28575%
8.00% 587% 1449% 2715% 4576% 7311% 11328% 17232% 25906% 38651%
9.00% 598% 1519% 2936% 5116% 8470% 13631% 21571% 33788% 52586%

You only need 15 years. It is much stronger and better likelihood.

From the math, those % should be over the gross income.

It is very simple.

Saving as a percentage over annual expense is a better approach.

KlangFool
Last edited by KlangFool on Fri Jul 28, 2017 8:22 am, edited 1 time in total.

aristotelian
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Re: Savings rate: gross or net?

Post by aristotelian » Fri Jul 28, 2017 8:00 am

Have you seen the Mr money mustache chart? He uses % of "take home pay"

basspond
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Re: Savings rate: gross or net?

Post by basspond » Fri Jul 28, 2017 8:05 am

Gross, too many variables and definitions that can mean net.

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CyclingDuo
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Re: Savings rate: gross or net?

Post by CyclingDuo » Fri Jul 28, 2017 8:16 am

basspond wrote:Gross, too many variables and definitions that can mean net.
Wait. Isn't somebody going to ask about AGI? Or MAGI? 8-)

We go with gross income for savings rate.
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bigred77
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Re: Savings rate: gross or net?

Post by bigred77 » Fri Jul 28, 2017 8:16 am

I've always assumed gross income was the denominator.

I thought this stemmed from general advice, which assumed new investors would start with their 401k first and foremost. If you want to save 15%, sign up for a 15% election to your 401k. That election is going to be based off of gross income.

I think we make this harder than it has to be. When I use the term savings rate I am talking about "total absolute dollars saved in tax advantaged accounts, including employer match, plus taxable investment accounts, plus savings accounts as long as those funds aren't for dedicated spending (cars, vacations, etc)" divided by "my gross base salary plus gross bonus/equity compensation"

My savings percentage for this year should 24%. If I measured my absolute dollars saved by my annual expenditures than I'm saving about 42% of my expenses annually.

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Re: Savings rate: gross or net?

Post by Jack FFR1846 » Fri Jul 28, 2017 8:27 am

The 10%, 20%, 30% of something numbers are just to "shock" those who save nothing into realizing that their retirement will include eating cat food if they don't start saving.

I don't know. I've always thought these percentages are all sort of meaningless. I look at how much I've put away for retirement each year as a percentage of gross and typically see percentages (including the 401k) that's well above 30%. Usually well above 50%. Not so much in recent years as college expenses are nearly 50% of my gross pay.
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nimo956
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Re: Savings rate: gross or net?

Post by nimo956 » Fri Jul 28, 2017 8:27 am

It should always be gross income. I use the formula Income = Savings + Expenses. I then break the %s down into the following categories in my budget:

Savings- 49%
Taxes- 18%
Rent+Util- 13%
Insurance- 3%
Groceries- 3%
Gas (Auto)- 1%
Restaurants/Shopping- 6%
Hobbies- 5%
Vacation- 2%
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LiterallyIronic
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Re: Savings rate: gross or net?

Post by LiterallyIronic » Fri Jul 28, 2017 8:35 am

nimo956 wrote:It should always be gross income. I use the formula Income = Savings + Expenses. I then break the %s down into the following categories in my budget:

Savings- 49%
Taxes- 18%
Rent+Util- 13%
Insurance- 3%
Groceries- 3%
Gas (Auto)- 1%
Restaurants/Shopping- 6%
Hobbies- 5%
Vacation- 2%
This confuses me. If you're making so much money that you can save 49%, only spend 13% on rent plus utilities, etc, then how are you only paying 18% in taxes?

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Re: Savings rate: gross or net?

Post by smitcat » Fri Jul 28, 2017 8:39 am

When we first started playing with these it made a lot of sense to work with ratios of what you were seeing each week.
But over time it became very apparent that working with a ratio of what you currently make vs what your current expenses were is always misleading - sometime a while lot.

As JackFFR1846 said....
"The 10%, 20%, 30% of something numbers are just to "shock" those who save nothing into realizing that their retirement will include eating cat food if they don't start saving."

Utilizing a ratio with your current expenses then requires you to 'adjust' for potentially too many things:
- mortgage
- kids daycare
- college ages
- state of residence
- taxes
- health care
- transportation
- travel/ recreation

Attempting to start where you are and adjust for almost everything does not give you the opportunity and experience to learn what you will need and how they work together for a future and often quite different budget.
Building your real expense for FI and/or retirement is not that hard and often much more enlightening than working with numbers that you know will not exist in a few years.

After much reading on this Bogle site the ratio we adopted was % of future FI/retire budget.

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Re: Savings rate: gross or net?

Post by smitcat » Fri Jul 28, 2017 8:44 am

LiterallyIronic wrote:
nimo956 wrote:It should always be gross income. I use the formula Income = Savings + Expenses. I then break the %s down into the following categories in my budget:

Savings- 49%
Taxes- 18%
Rent+Util- 13%
Insurance- 3%
Groceries- 3%
Gas (Auto)- 1%
Restaurants/Shopping- 6%
Hobbies- 5%
Vacation- 2%
This confuses me. If you're making so much money that you can save 49%, only spend 13% on rent plus utilities, etc, then how are you only paying 18% in taxes?
This is why these types of ratios do not make sense to me or for many folks. I am sure that the answer to your question becomes more evident when you apply many different sets of incomes to those %'s.
For example - all of the savings (49%) can be pre pre tax, they file mfj , they have decent deductions and they live fairly inexpensively.
But the real point is that while these are good for this poster they may not be good for you or I.
Will it be enough? Only your numbers count and how well you have it figured out.

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Re: Savings rate: gross or net?

Post by nimo956 » Fri Jul 28, 2017 9:00 am

LiterallyIronic wrote:
nimo956 wrote:It should always be gross income. I use the formula Income = Savings + Expenses. I then break the %s down into the following categories in my budget:

Savings- 49%
Taxes- 18%
Rent+Util- 13%
Insurance- 3%
Groceries- 3%
Gas (Auto)- 1%
Restaurants/Shopping- 6%
Hobbies- 5%
Vacation- 2%
This confuses me. If you're making so much money that you can save 49%, only spend 13% on rent plus utilities, etc, then how are you only paying 18% in taxes?
It actually only works if you don't have a very high income. I just cracked the 25% bracket after being the in 15% bracket for many years. If you are in the highest tax brackets, then taxes will take up a much larger portion of your income, which means your savings % will have to be lower. I guess this is why it's best to answer the question, "how much in absolute dollars do I need to save each year to retire?" But that question is fraught with uncertainty as well. My personal opinion is to just save everything that you can until it hurts, and then back it off a little.
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Re: Savings rate: gross or net?

Post by Spirit Rider » Fri Jul 28, 2017 9:06 am

To further confuse the issue, I have always used Net of Gross. This is because pre-tax savings are less than after-tax savings.

If you want a 20% net of gross savings rate with a gross salary of $120K and 25% marginal tax rate. A pre-tax 401k deferral of $18K, a 3% employer match (always pre-tax) and a Roth IRA contribution of $5500 gives you the following.

($18K + $3.6K = 21.6K) * 0.75 = $16.2K + $5.5K = $21.7K. to reach 20% ($24K) requires an additional $2.3K in taxable savings.

As has been mentioned, setting your spending rate is a better way to accomplish this. I found that setting my spending rate to 50% gave me a 18% - 22% net of gross savings rate.

You do this simply by sending your payroll direct deposit to two places. 50% of gross to your spending account and the balance to your "savings" account (this was my brokerage account).

The beauty of this Is that it will automatically adjust to raises and if your SS wages are > the max wage base, at that point in the year automatically send the extra.to savings.

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Re: Savings rate: gross or net?

Post by ofcmetz » Fri Jul 28, 2017 9:12 am

I keep it simple and measure my savings rate as a percentage of gross income. I don't compare myself to others instead I use their incredible savings habits to motivate me.

If you can't save 10 to 15% of gross when into your professional career then you really to look at things. We used to shoot for 15% and are now at 25%.
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Re: Savings rate: gross or net?

Post by noco-hawkeye » Fri Jul 28, 2017 9:18 am

I posted a similar thing in another thread about savings rate, I'll try again here....

First you need to calculate what your expenses in retirement will be. Many people can use current income as a rough guess, but bogleheads typically don't need that much.

When I ran the numbers for contributing 30% of your retirement income, for 30 years - I came out with a safe withdrawal rate of less than 4%, it might have been closer to 3% or even lower.

Right now I am saving more than 50% of my expected retirement expenses a year, I've got about 15-20X of my expenses already saved, and I still have about 20 years left to work. I might need to use a good chunk of cash in a few years and the kids get to college, but otherwise we are on track to travel a bit more. I might also take lower paying jobs which provide less stress / more satisfaction.

:sharebeer

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Re: Savings rate: gross or net?

Post by noco-hawkeye » Fri Jul 28, 2017 9:21 am

nimo956 wrote: My personal opinion is to just save everything that you can until it hurts, and then back it off a little.
This is a great answer ^. +1

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Re: Savings rate: gross or net?

Post by goingup » Fri Jul 28, 2017 9:23 am

I think the 10,20,30% saving idea is good for folks who are just beginning to think about saving for retirement. It may help them think about what % to try to save in their 401K/403B, and that saving in an IRA might also be required to hit an overall target savings %.

Since we got serious about saving 20 years ago we have used a $$ target, set forth every January. It's a combination of pre-tax and post-tax dollars. I'm not too concerned about what % it is of gross/net. I have found real $$ number targets are meaningful and get us focused on hitting the goal in real terms.

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Re: Savings rate: gross or net?

Post by TSquare » Fri Jul 28, 2017 9:40 am

I did some homework when I started investing, and I settled on using gross income, and made 15% of gross my target savings rate. Using my gross income just makes it easier to run the numbers. 15% is more than some, but less than others. When I retire, I'll adjust my lifestyle accordingly to work with whatever amount of money I end up with.

-tsquare

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Re: Savings rate: gross or net?

Post by The Wizard » Fri Jul 28, 2017 9:42 am

CyclingDuo wrote:
basspond wrote:Gross, too many variables and definitions that can mean net.
Wait. Isn't somebody going to ask about AGI? Or MAGI? 8-)

We go with gross income for savings rate.
Some folks get significant income from rental property, self employment, or investment income, not just a paycheck, so AGI captures all that.
But it misses pretax contributions to retirement plans, so need to add that back in to both numerator and denominator...
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Re: Savings rate: gross or net?

Post by H-Town » Fri Jul 28, 2017 9:48 am

noco-hawkeye wrote:
nimo956 wrote: My personal opinion is to just save everything that you can until it hurts, and then back it off a little.
This is a great answer ^. +1
^ This! I save as much as I can. I use % savings as a reference purpose for my own track record. I don't compare my %'s with others' as it is useless and unproductive.

I use this to calculate my saving %:

Gross pay
- 401k contribution---------------------x1
- automatic deposit to Roth IRA------x1
- automatic deposit to brokerage----x1
--------------------------------------------
= Take home Pay
- monthly expenses
--------------------------------------------
= Net Income
- deposit to saving accounts----------x1
- deposit to brokerage-----------------x1
--------------------------------------------
= 0

Saving rate = Sum of x1 / Gross Pay.

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Re: Savings rate: gross or net?

Post by The Wizard » Fri Jul 28, 2017 10:05 am

KlangFool wrote:
Saving as a percentage over annual expense is a better approach.
It's a little hard to determine this number directly, partly because "annual expense" is fuzzy. (Does it include income taxes?)

But I like gross income analysis for a very related reason. And that is that it helps you determine your Adjusted Net Income, which is income after federal and state income taxes, after FICA, and after 401(k)/403(b) contributions.
Additional Adjustments include subtracting Roth IRA contributions and subtracting money invested in your taxable accounts for the long term.
Money saved for vacations or new cars is not long term.

This Adjusted Net Income (as I call it) is a conservative estimate of your actual annual spending from the top down, not bottom up.
This is an important number to know in the years just prior to retirement...
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Re: Savings rate: gross or net?

Post by KlangFool » Fri Jul 28, 2017 10:13 am

The Wizard wrote:
KlangFool wrote:
Saving as a percentage over annual expense is a better approach.
It's a little hard to determine this number directly, partly because "annual expense" is fuzzy. (Does it include income taxes?)
The Wizard,

I would like to understand why you say that.

Annual expense = Gross income - Annual Savings - Tax ( Federal Income + State Income + City income + FICA + Medicare)

For "Pay Yourself First" folks, annual saving is pre-determined.

Taxes could be known from annual social security statement, Federal and state income tax files.

So, the current annual expense could be calculated easily.

Retirement expense is a bit harder but unavoidable.

KlangFool

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Re: Savings rate: gross or net?

Post by The Wizard » Fri Jul 28, 2017 10:28 am

KlangFool wrote:
The Wizard wrote:
KlangFool wrote:
Saving as a percentage over annual expense is a better approach.
It's a little hard to determine this number directly, partly because "annual expense" is fuzzy. (Does it include income taxes?)
The Wizard,

I would like to understand why you say that.

Annual expense = Gross income - Annual Savings - Tax ( Federal Income + State Income + City income + FICA + Medicare)

For "Pay Yourself First" folks, annual saving is pre-determined.

Taxes could be known from annual social security statement, Federal and state income tax files.

So, the current annual expense could be calculated easily.

Retirement expense is a bit harder but unavoidable.

KlangFool
I think we're saying close to the same thing, Klang, computing Annual Expenses from the top down rather than trying to add up utility bills, estimated food expenses, etc. So neither of our expense approaches are fuzzy.

I only said "a little hard" to compute (savings/annual_expense) since an accurate number for each year might not be known till after New Year's when you do your taxes.
But it's certainly a good metric to summarize a year's finances, no question...
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JGoneRiding
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Re: Savings rate: gross or net?

Post by JGoneRiding » Fri Jul 28, 2017 10:42 am

bottlecap wrote:
TomatoTomahto wrote:I can't save what I never had, so basing it on gross seems counter-intuitive.
Excellent point.

It's a reminder, OP, that you have to account for some taxes, as well. You can't spend what you never have in retirement.

JT

That may be but 401k numbers etc are based on gross. (and you never have the money so all the better right!!) Plus depending on how you withhold you might get the money at some point right.

If the goal is to figure out how much you should be saving for retirement those numbers are generally based on gross and if you start at 10-15% when you start working you "should" be fine in the long run as long as you invest reasonable and steadily and keep it constant.

JGoneRiding
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Re: Savings rate: gross or net?

Post by JGoneRiding » Fri Jul 28, 2017 10:48 am

CyclingDuo wrote:
basspond wrote:Gross, too many variables and definitions that can mean net.
Wait. Isn't somebody going to ask about AGI? Or MAGI? 8-)

We go with gross income for savings rate.
I like your idea! but of course I never know those numbers till I finish the taxes and by the time I do that going back and calculating what my savings rate was for the year sounds like to much work! But that would really be the most right number. Savings as a percent of AGI Or Magi (that is a harder number turbo puts my AGI on the front page along with my effective tax rate--which is a great number more people should know)

mhalley
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Re: Savings rate: gross or net?

Post by mhalley » Fri Jul 28, 2017 11:30 am

Mr Money Musctaches chart is great as it shows what the different savings rate do to the time to financial independence. It is easy to see why 15% shows up, as it takes 43 years to reach if at that top rate, i.e. From age 22-------->65.
Bump it to 20 and you drop fi to 60. 25%------->55. 30%---->51. 50%-->39!
http://www.mrmoneymustache.com/2012/01/ ... etirement/

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DaftInvestor
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Re: Savings rate: gross or net?

Post by DaftInvestor » Fri Jul 28, 2017 11:55 am

Fidelity's viewpoints newletter this month makes the statement 15% pretax "Including employer contributions".
They tout 50/15/5 plan:
Key takeaways
✔ Allocating no more than 50% of take-home pay to essential expenses.
✔ Trying to save 15% of pretax income (including employer contributions) for retirement.
✔ Keeping 5% of take-home pay in short-term savings for unplanned expenses.
https://www.fidelity.com/viewpoints/per ... il_monthly

JeepDaze
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Re: Savings rate: gross or net?

Post by JeepDaze » Fri Jul 28, 2017 12:04 pm

mikeguima wrote:Hey everyone!

I posted this in the other thread about each one's personall savings rate but since it was a relatively different subject, I'll (re)post the question here:
"
Save 10% and you'll be fine
Save 20% and you'll thrive
Save 30% and you'll be wealthy
Sounds awesome! :D

One major doubt I have is if most recommended savings rate are in function of gross income or after-tax income. In the Bogleheads book it has an example of at least 10% of take-home pay (which I assume is after tax, right?); in "If You Can" by Dr. Bernstein it says 15% of income, which I then assume is gross income.

In Tony Robbin's book, it says this: "If you’re looking for guidance on this, experts say you should plan to save at least a minimum of 10% of your income, although in today’s economy many agree 15% is a far better number, especially if you’re over the age of 40".

These 10% are over gross or net income? I can't figure that out, everybody uses different reference points for salary.

What do you guys think?
EDIT: This article by investopedia claims it's computed over net income: http://www.investopedia.com/terms/s/savings-rate.asp
These savings rates published by OECD by country are net savings, which I assume they're also after tax: http://stats.oecd.org/Index.aspx?QueryId=51648"

Thanks!
I use gross for two simple reasons:

1) it's easier to calculate (no need to calculate what expenses/investments/etc to remove from the denominator)
2) it's more conservative (if i save 30% of gross, then that gives me a sense of accomplishment since it would be way higher than 30% of net).

David Scubadiver
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Re: Savings rate: gross or net?

Post by David Scubadiver » Fri Jul 28, 2017 12:26 pm

I too belong to the camp of figure out what you need, by when you will need it and save accordingly. What difference does it make how much you earn and what percentage of that you devote to saving if it does not get you what you need when you need to be there?

It is like the rule of thumb is written for someone who has no idea what they will need, or when they will need it. And if so, they shouldn't really care whether they are calculating off of the net or the gross, because, really, why does it matter if you have no clue what you are hoping to accomplish and by when?

Figure out what you spend/will spend in retirement. Figure out what you need to save to get there and then get to it. Don't save less than you need because you saved a percentage of your salary. If you saved more than you need, feel free to save less/spend more if that makes you happy.

David Scubadiver
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Re: Savings rate: gross or net?

Post by David Scubadiver » Fri Jul 28, 2017 12:33 pm

Also, you will neither be fine, thrive nor be wealthy if you save 10%/15%/30% of nothing. So work on maximizing the income if you are hell bent on saving a fixed percentage of your income. Probably makes sense to attack the problem on both ends -- work to minimize expenses and maximize income and you will be better off than if you didn't. Whether you will be fine, thrive or wealthy depends on the differential over time.

Jags4186
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Re: Savings rate: gross or net?

Post by Jags4186 » Fri Jul 28, 2017 12:38 pm

It's gross and I don't understand why this is an issue. Is this an issue because you can't save 50% of your gross? So? I would rather say I saved 25% of gross than 30% of net. But maybe you feel better saying you save 30% of net. If I increase my savings from 25% gross to 26% gross that's more impactful than going from 25% net to 26% net. Net pay is easily manipulated and depend son too many factors, gross is not affected by tax brackets, dependents health insurance premiums, etc.

2bdbest
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Re: Savings rate: gross or net?

Post by 2bdbest » Fri Jul 28, 2017 1:28 pm

Does saving rate includes company match and 529 contributions?

David Scubadiver
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Re: Savings rate: gross or net?

Post by David Scubadiver » Fri Jul 28, 2017 1:45 pm

2bdbest wrote:Does saving rate includes company match and 529 contributions?
Company match is not savings. It is income. The result of which is that you have to save an additional 20% of the match.
529 Contributions are savings. It doesn't matter where you save the money.

KlangFool
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Re: Savings rate: gross or net?

Post by KlangFool » Fri Jul 28, 2017 2:05 pm

2bdbest wrote:Does saving rate includes company match and 529 contributions?
2bdbest,

1) Please note that this question goes away as soon as the saving rate is based on either current annual expense or retirement expense.

2) What is the goal of calculating this saving rate? Is it for retirement and/or financial independent? Will you be using the 529's money for retirement and/or FI?

KlangFool

drg02b
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Re: Savings rate: gross or net?

Post by drg02b » Fri Jul 28, 2017 2:08 pm

My net savings rate is 100% after subtracting out taxes and living expenses.

miamivice
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Re: Savings rate: gross or net?

Post by miamivice » Fri Jul 28, 2017 2:10 pm

Both retirement and 529 savings are money saved today for planned future expenditures. I would include them both in your savings rate.

KlangFool
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Re: Savings rate: gross or net?

Post by KlangFool » Fri Jul 28, 2017 2:21 pm

Folks,

It is very simple and straight forward.

Saving rate or whatever metric should be used and calculated in order to let you know whether you can reach your goal.

1) If your goal is retirement, saving rate as per your retirement expense is a better measurement.

2) If your goal is financially independent, saving rate as per your current annual expense is a better measurement.

3) Saving rate over gross or net income gives you some kind of bragging right to compare against other. But, it is a useless metric in order to gauge whether you can reach your own goal at the right time.

Let's take an extreme example, I am saving 0% now since I am "cash flowing" my kids' college education. But, this saving rate is meaningless. My portfolio is big enough that I can get to my number in a few years with 0% saving rate.

Focus on your own goal. Find your own number. Stop comparing yourself with others. Live your own life.

KlangFool

Tamales
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Re: Savings rate: gross or net?

Post by Tamales » Fri Jul 28, 2017 2:23 pm

Calculation I use for the dollar amount of savings (e.g. for 2016):
[gross wages from 12/31/16 paystub]
– [2016 OASDI taxes from 12/31/16 paystub]
- [2016 Medicare taxes from 12/31/16 paystub]
- [2016 State taxes from 12/31/16 paystub]
+[State tax refund (or minus amt owed to state) from state tax form]
– [2016 Form 1040 line 63 total fed income tax owed]
– [2016 living expenses (from your own spreadsheet)]
+ [2016 employer contribution to retirement acct]
+ [2016 Form 1040-8a taxable interest]
+ [2016 Form 1040-8b tax exempt interest]
+ [2016 Form 1040-9a ordinary dividends]

From this thread: viewtopic.php?f=1&t=222473
Last edited by Tamales on Fri Jul 28, 2017 2:32 pm, edited 1 time in total.

Spirit Rider
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Re: Savings rate: gross or net?

Post by Spirit Rider » Fri Jul 28, 2017 2:25 pm

David Scubadiver wrote:Company match is not savings. It is income. The result of which is that you have to save an additional 20% of the match.
The company match should be considered both income and savings. However, like pre-tax employee deferrals, the employer match is deferred from ordinary income tax. If for purposes of your retirement savings rate, you are going to discount the pre-tax employer match, you should likewise discount pre-tax employee deferrals.
529 Contributions are savings. It doesn't matter where you save the money.
It does matter where you save money. 529 Contributions are part of your overall savings rate, but they are not part of your retirement savings rate.

The Wizard
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Re: Savings rate: gross or net?

Post by The Wizard » Fri Jul 28, 2017 2:49 pm

David Scubadiver wrote:
2bdbest wrote:Does saving rate includes company match and 529 contributions?
Company match is not savings. It is income. The result of which is that you have to save an additional 20% of the match.
529 Contributions are savings. It doesn't matter where you save the money.
I add the company 403b matching contribution to both the numerator and denominator of my computation.
It's an additional increment of income beyond my salary and 100% of that increment goes to retirement savings...
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