The Magic of Savings Rate

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KlangFool
Posts: 6987
Joined: Sat Oct 11, 2008 12:35 pm

Re: The Magic of Savings Rate

Post by KlangFool » Thu Sep 21, 2017 4:19 pm

randomguy wrote:
Thu Sep 21, 2017 3:37 pm
MrNewEngland wrote:
Thu Sep 21, 2017 2:11 pm
KlangFool wrote:
Tue Sep 19, 2017 8:17 pm
Folks,

It is very simple but hard to do.

All you need is saving rate in terms of your annual expense. If you save 100% of your annual expense every year, you can reach FI in 25 or 33 years even with 0% real return.

KlangFool
If you can save 100% of your salary you are already financially independent.
My 5 year old saved 100% of you his salary last year. Is he financially independent? Obviously not. He is dependant on the current situation continuing which in reality it will not. I think you will find that is true of pretty much every case where you can save 100% of your salary. Few people get all their life expenses subsidized forever.

KlangFool's use of any expenses instead of income has a lot of benefits. You have to define expenses but it is a lot more directly related to when someone can retire rather than savings rate which tries to infer spending. For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.

Fidelity and the like prefer to use things like 12x of salary to 25x of expenses for the simple reason that few people know their expenses. Most people know their salary.
randomguy,

The problem is a person has to either know

A) Retirement expense if they are aiming for retirement.

B) Current expense if they are aiming for FI.

There is no escaping the expense if a person wants to know their number.

Once a person has the expense number (A or B), it is easy to calculate the saving rate based on expense.

KlangFool

randomguy
Posts: 4890
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 4:41 pm

FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).

The chart has a bunch of assumptions baked into it. You need your situation to match those assumptions for the output to make sense.

randomguy
Posts: 4890
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 4:56 pm

KlangFool wrote:
Thu Sep 21, 2017 4:19 pm


randomguy,

The problem is a person has to either know

A) Retirement expense if they are aiming for retirement.

B) Current expense if they are aiming for FI.

There is no escaping the expense if a person wants to know their number.

Once a person has the expense number (A or B), it is easy to calculate the saving rate based on expense.

KlangFool
I agree. But if you are writing a blog post or giving a seminar and you say multiply your expense by 25x, peoples eyes glaze over and have no clue what you are talking about. Tell them to multiply their salary by 20% (or 10x) and they will at least have a clue.

I would say that B+A are pretty much the same but a lot depends on your definitions. To me if you can't retire, your not FI. I know others feel differently. Current expense is not accurate for FI since future expenses could be significantly higher (you have to pay 10k/year for health insurance) or lower (you save 3k in commuting costs). In the end you make your guesses, through in some error margins and hope everything works out.

KlangFool
Posts: 6987
Joined: Sat Oct 11, 2008 12:35 pm

Re: The Magic of Savings Rate

Post by KlangFool » Thu Sep 21, 2017 5:12 pm

randomguy wrote:
Thu Sep 21, 2017 4:56 pm
KlangFool wrote:
Thu Sep 21, 2017 4:19 pm


randomguy,

The problem is a person has to either know

A) Retirement expense if they are aiming for retirement.

B) Current expense if they are aiming for FI.

There is no escaping the expense if a person wants to know their number.

Once a person has the expense number (A or B), it is easy to calculate the saving rate based on expense.

KlangFool
I agree. But if you are writing a blog post or giving a seminar and you say multiply your expense by 25x, peoples eyes glaze over and have no clue what you are talking about. Tell them to multiply their salary by 20% (or 10x) and they will at least have a clue.

I would say that B+A are pretty much the same but a lot depends on your definitions. To me if you can't retire, your not FI. I know others feel differently. Current expense is not accurate for FI since future expenses could be significantly higher (you have to pay 10k/year for health insurance) or lower (you save 3k in commuting costs). In the end you make your guesses, through in some error margins and hope everything works out.
randomguy,

<<To me if you can't retire, your not FI. I know others feel differently.>>

I disagreed. For most people, retirement implies retiring at retirement age with pension/social security. FI does not have this implication.

<<Current expense is not accurate for FI since future expenses could be significantly higher (you have to pay 10k/year for health insurance) or lower (you save 3k in commuting costs).>>

Or lower. In any case, it is a good first approximation.

KlangFool

teen persuasion
Posts: 363
Joined: Sun Oct 25, 2015 1:43 pm

Re: The Magic of Savings Rate

Post by teen persuasion » Thu Sep 21, 2017 6:55 pm

randomguy wrote:
Thu Sep 21, 2017 4:41 pm
FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).

The chart has a bunch of assumptions baked into it. You need your situation to match those assumptions for the output to make sense.
For those who have obviously not read the blog post: http://www.mrmoneymustache.com/2012/01 ... irement/
It turns out that when it boils right down to it, your time to reach retirement depends on only one factor:

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

KlangFool
Posts: 6987
Joined: Sat Oct 11, 2008 12:35 pm

Re: The Magic of Savings Rate

Post by KlangFool » Thu Sep 21, 2017 7:02 pm

teen persuasion wrote:
Thu Sep 21, 2017 6:55 pm
randomguy wrote:
Thu Sep 21, 2017 4:41 pm
FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).

The chart has a bunch of assumptions baked into it. You need your situation to match those assumptions for the output to make sense.
For those who have obviously not read the blog post: http://www.mrmoneymustache.com/2012/01 ... irement/
It turns out that when it boils right down to it, your time to reach retirement depends on only one factor:

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
teen persuasion,

A) You can use 3 numbers: income, saving, the expense to come up a useless saving rate based on income.

Or,

B) You can use 2 numbers: saving and expense to come up a useful saving rate based on expense.

Why do we want to do (A)?

What is the point of reading any blog post that discussing saving rate based on income? It is a waste of time and energy.

KlangFool
Last edited by KlangFool on Thu Sep 21, 2017 9:28 pm, edited 1 time in total.

Olemiss540
Posts: 189
Joined: Fri Aug 18, 2017 8:46 pm

Re: The Magic of Savings Rate

Post by Olemiss540 » Thu Sep 21, 2017 9:17 pm

KlangFool wrote:
Thu Sep 21, 2017 7:02 pm
teen persuasion wrote:
Thu Sep 21, 2017 6:55 pm
randomguy wrote:
Thu Sep 21, 2017 4:41 pm
FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).

The chart has a bunch of assumptions baked into it. You need your situation to match those assumptions for the output to make sense.
For those who have obviously not read the blog post: http://www.mrmoneymustache.com/2012/01 ... irement/
It turns out that when it boils right down to it, your time to reach retirement depends on only one factor:

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
teen persuasion,

A) You can use 3 numbers: income, saving, the expense to come up a useless saving rate based on income.

Or,

B) You can use 2 numbers: saving and expense to come up a useful saving rate based on expense.

Why do we want to do (B)?

What is the point of reading any blog post that discussing saving rate based on income? It is a waste of time and energy.

KlangFool
Agreed! Excuse me, I have to get back to reading what is trending on reddit.

randomguy
Posts: 4890
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 9:45 pm

teen persuasion wrote:
Thu Sep 21, 2017 6:55 pm
randomguy wrote:
Thu Sep 21, 2017 4:41 pm
FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).

The chart has a bunch of assumptions baked into it. You need your situation to match those assumptions for the output to make sense.
For those who have obviously not read the blog post: http://www.mrmoneymustache.com/2012/01 ... irement/
It turns out that when it boils right down to it, your time to reach retirement depends on only one factor:

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

First off the blog post wasn't linked in the start. But lets see how that math works out when we use that definition.:)

So you don't think I am just making up numbers. Here is a real live frugal living blogger like we are talking about.
http://rootofgood.com/make-six-figure-i ... ay-no-tax/

There take home pay is going to be on the order of 60k (only taking payroll taxes out.). They are saving 67k between 401(k),IRA, 457, and the pension. Assuming no other savings we are looking ~60k of spending (HSA + dependant care). They have 110% savings rate though (67/60). According to the chart they can retire today with 67k. Does anyone in the world think that retiring with 67k in the bank and 60k/year of expenses is remotely FI:)

Obviously that is the extreme case but you run into the same thing on a lessor scale when people invest a lot in 401(k). Take a couple making 100k/yr jointly who are investing 36k/year in a 401(k). There take home is on the order of 50k (a bit of federal, state taxes, 10k of payroll). 36/50 = 72% That is 8.5 years from the chart. Do you think retiring with say 600k (assuming good growth) and needind to spend 50k and pay taxes is in the ballpark?

Using take home pay is fundamentally flawed when most peoples saivngs don't come out of take home pay.

MMM is a fun read. But I wouldn't ever call the math he does very rigorous or exact and always comes across as more driven by ideology than facts. But that is part of makes him fun to read.

lazydavid
Posts: 1148
Joined: Wed Apr 06, 2016 1:37 pm

Re: The Magic of Savings Rate

Post by lazydavid » Thu Sep 21, 2017 9:54 pm

You would need to consider 401k contributions and the like as a portion of take-home pay, even though it doesn't actually deposit into your checking account. Call it "beneficial pay" if you want--basically money that winds up in your hands somehow. Taxes are just gone, so they would be excluded from calculating one's savings rate.

teen persuasion
Posts: 363
Joined: Sun Oct 25, 2015 1:43 pm

Re: The Magic of Savings Rate

Post by teen persuasion » Thu Sep 21, 2017 9:55 pm

I realize the MMM post wasn't included in the OP; someone mentioned it was an obvious reference to it, so I thought I'd offer the link.

Another helpful quote from the Shockingly Simple post:
** 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.

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MossySF
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Contact:

Re: The Magic of Savings Rate

Post by MossySF » Thu Sep 21, 2017 10:01 pm

Let''s not argue about details you don't have much control over (taxes). In a developed country, you will be taxed. Why even bother considering that part of your income when you never even see it in your bank account?

User avatar
FiveK
Posts: 3155
Joined: Sun Mar 16, 2014 2:43 pm

Re: The Magic of Savings Rate

Post by FiveK » Thu Sep 21, 2017 10:05 pm

randomguy wrote:
Thu Sep 21, 2017 4:41 pm
FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).
I'm not following - where did the $650K come from? If you are living on $500K and thus saving $100K, that's ~17% savings rate and sometime between 37 and 43 years is not unreasonable.

Having said that, I agree with KlangFool that saving and expense numbers are sufficient, and savings rate causes more confusion than it clarifies.

KlangFool
Posts: 6987
Joined: Sat Oct 11, 2008 12:35 pm

Re: The Magic of Savings Rate

Post by KlangFool » Thu Sep 21, 2017 10:12 pm

FiveK wrote:
Thu Sep 21, 2017 10:05 pm
randomguy wrote:
Thu Sep 21, 2017 4:41 pm
FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).
I'm not following - where did the $650K come from? If you are living on $500K and thus saving $100K, that's ~17% savings rate and sometime between 37 and 43 years is not unreasonable.

Having said that, I agree with KlangFool that saving and expense numbers are sufficient, and savings rate causes more confusion than it clarifies.
FiveK,

Why do people choose to overcomplicate something simple? I guess they have to write something. Or else, there is nothing left to write. It takes less than a few paragraphs to work out the whole plan.

1) Find out your expense number that you aim for.

2) Pick a number between 25X to 40X depending on the age Y when you want to FI or retire

3) Pick your annual saving.

4) Pick an AA and assume an annual return rate of 5% to 9%

5) Use Excel to calculate whether you can reach your number in age Y.

6) If the answer is no, go back to (3) and increase your saving.

I had just given out the whole plan.

KlangFool

teen persuasion
Posts: 363
Joined: Sun Oct 25, 2015 1:43 pm

Re: The Magic of Savings Rate

Post by teen persuasion » Thu Sep 21, 2017 10:16 pm

MossySF wrote:
Thu Sep 21, 2017 10:01 pm
Let''s not argue about details you don't have much control over (taxes). In a developed country, you will be taxed. Why even bother considering that part of your income when you never even see it in your bank account?
But I do have control over my taxes, thru the very act of saving in retirement accounts. If we do not save, our federal + state income tax would be $4420. When we do save, our federal + state refunds would be $5525. That's nearly $10k difference. I save that, too, to Roth IRAs.

User avatar
FiveK
Posts: 3155
Joined: Sun Mar 16, 2014 2:43 pm

Re: The Magic of Savings Rate

Post by FiveK » Thu Sep 21, 2017 10:21 pm

KlangFool wrote:
Thu Sep 21, 2017 10:12 pm
FiveK,

Why do people choose to overcomplicate something simple? I guess they have to write something. Or else, there is nothing left to write. It takes less than a few paragraphs to work out the whole plan.

1) Find out your expense number that you aim for.

2) Pick a number between 25X to 40X depending on the age Y when you want to FI or retire

3) Pick your annual saving.

4) Pick an AA and assume an annual return rate of 5% to 9%

5) Use Excel to calculate whether you can reach your number in age Y.

6) If the answer is no, go back to (3) and increase your saving.

I had just given out the whole plan.

KlangFool
Obviously neither you nor I have discovered how to package that plan in such a way that we could earn $400,000 a year. But hey, kudos to MMM for doing so.

randomguy
Posts: 4890
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 10:22 pm

FiveK wrote:
Thu Sep 21, 2017 10:05 pm
randomguy wrote:
Thu Sep 21, 2017 4:41 pm
FiveK wrote:
Thu Sep 21, 2017 3:56 pm
randomguy wrote:
Thu Sep 21, 2017 3:37 pm
For example imagine
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k
d) save 575k

So I have a savings rate of 57% and according to the chart I can retire in 14 years. It takes about 2 seconds of thought to say that is total BS and that you will actually hit retirement around 1.5-3 years depending on your return assumptions. The savings rate calculation fails to account for my expenses dropping by 95% or so when I retire. As always when you use rules of thumb like this you need to understand the assumptions that are used.
Unless one defines savings rate as savings/(after tax income), in which case you have a 575/600 = 95.8% savings rate and the chart works.
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).
I'm not following - where did the $650K come from? If you are living on $500K and thus saving $100K, that's ~17% savings rate and sometime between 37 and 43 years is not unreasonable.

Having said that, I agree with KlangFool that saving and expense numbers are sufficient, and savings rate causes more confusion than it clarifies.
Taxes. You are spending 500k in retirement. To generate 500k of spendable money you need on the order of 650k of total income with a lot of caveats about how taxes for everyone are different. MMM (since we seems to be talking about him) tends to ignore taxes since he doesn't pay them:)

randomguy
Posts: 4890
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 10:24 pm

teen persuasion wrote:
Thu Sep 21, 2017 10:16 pm
MossySF wrote:
Thu Sep 21, 2017 10:01 pm
Let''s not argue about details you don't have much control over (taxes). In a developed country, you will be taxed. Why even bother considering that part of your income when you never even see it in your bank account?
But I do have control over my taxes, thru the very act of saving in retirement accounts. If we do not save, our federal + state income tax would be $4420. When we do save, our federal + state refunds would be $5525. That's nearly $10k difference. I save that, too, to Roth IRAs.
But did you save on taxes or just defer them? That depends on your future expectations. I for one expect that the rootofgood blogers (140k income, o in taxes) are making a mistake by paying so little in taxes now. My guess is that they would be better contributing to a ROTH instead of tIRA and paying some more taxes in the 10% bracket. But there is a lot of guess work involved there.

The reason not to avoid them is that they might not go away in retirement unless you are talking low income levels. Sure if you are living on 20k of spending, managing income to pay about 0 is doable. Spending 200k though makes it very hard without making other questionable choices (i.e. you can pay 0 taxes at the cost of poor investment returns).In the middle it gets interesting especially if you live in a state with taxes as a lot of states are very regressive.

KlangFool
Posts: 6987
Joined: Sat Oct 11, 2008 12:35 pm

Re: The Magic of Savings Rate

Post by KlangFool » Thu Sep 21, 2017 10:27 pm

FiveK wrote:
Thu Sep 21, 2017 10:21 pm
KlangFool wrote:
Thu Sep 21, 2017 10:12 pm
FiveK,

Why do people choose to overcomplicate something simple? I guess they have to write something. Or else, there is nothing left to write. It takes less than a few paragraphs to work out the whole plan.

1) Find out your expense number that you aim for.

2) Pick a number between 25X to 40X depending on the age Y when you want to FI or retire

3) Pick your annual saving.

4) Pick an AA and assume an annual return rate of 5% to 9%

5) Use Excel to calculate whether you can reach your number in age Y.

6) If the answer is no, go back to (3) and increase your saving.

I had just given out the whole plan.

KlangFool
Obviously neither you nor I have discovered how to package that plan in such a way that we could earn $400,000 a year. But hey, kudos to MMM for doing so.
FiveK,

Kudos to MMM. But, please do not allow this kind of overcomplicated stuff to spread in this forum. Let's keep it simple and real.

KlangFool

User avatar
FiveK
Posts: 3155
Joined: Sun Mar 16, 2014 2:43 pm

Re: The Magic of Savings Rate

Post by FiveK » Thu Sep 21, 2017 10:31 pm

randomguy wrote:
Thu Sep 21, 2017 10:22 pm
FiveK wrote:
Thu Sep 21, 2017 10:05 pm
randomguy wrote:
Thu Sep 21, 2017 4:41 pm
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).
I'm not following - where did the $650K come from? If you are living on $500K and thus saving $100K, that's ~17% savings rate and sometime between 37 and 43 years is not unreasonable.

Having said that, I agree with KlangFool that saving and expense numbers are sufficient, and savings rate causes more confusion than it clarifies.
Taxes. You are spending 500k in retirement. To generate 500k of spendable money you need on the order of 650k of total income with a lot of caveats about how taxes for everyone are different. MMM (since we seems to be talking about him) tends to ignore taxes since he doesn't pay them:)
Simply going back to your original example:
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k500K
d) save 575k100K

Using those numbers, =NPER(5%,-100000,0,500000/4%) gives 40.6 years, just as MMM's post lists.

teen persuasion
Posts: 363
Joined: Sun Oct 25, 2015 1:43 pm

Re: The Magic of Savings Rate

Post by teen persuasion » Thu Sep 21, 2017 10:40 pm

randomguy wrote:
Thu Sep 21, 2017 10:24 pm
teen persuasion wrote:
Thu Sep 21, 2017 10:16 pm
MossySF wrote:
Thu Sep 21, 2017 10:01 pm
Let''s not argue about details you don't have much control over (taxes). In a developed country, you will be taxed. Why even bother considering that part of your income when you never even see it in your bank account?
But I do have control over my taxes, thru the very act of saving in retirement accounts. If we do not save, our federal + state income tax would be $4420. When we do save, our federal + state refunds would be $5525. That's nearly $10k difference. I save that, too, to Roth IRAs.
But did you save on taxes or just defer them? That depends on your future expectations. I for one expect that the rootofgood blogers (140k income, o in taxes) are making a mistake by paying so little in taxes now. My guess is that they would be better contributing to a ROTH instead of tIRA and paying some more taxes in the 10% bracket. But there is a lot of guess work involved there.
That's a good question. General advice would have us fund Roth 401k over traditional, as we have been in low brackets, partially to zero with all of our traditional contributions. But the refundable credits create some interesting marginal tax rates in phaseout regions, and because our state proportionately matches them. The EITC phaseout rate is 21% the state match is 30% (so effectively 6.3%), state tax rate is 4% (never get to zero bracket there) and federal rate is mostly 10%, for a grand total of a 41.3% marginal rate. Even without the kids and all their exemptions in the future, I doubt we'll hit that high a rate in retirement drawdown.

The other side is that those refundable credits are funding more retirement contributions, not just avoided tax. So this approach increases our savings every year. As I put those in Roth, we are at least partially diversified by type. Our totals are roughly 1/3 Roth, 2/3 traditional at the moment. If we FIRE mid-fifties, we'll have time to Roth convert more before SS and RMDs at 70.

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Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 10:43 pm

FiveK wrote:
Thu Sep 21, 2017 10:31 pm
randomguy wrote:
Thu Sep 21, 2017 10:22 pm
FiveK wrote:
Thu Sep 21, 2017 10:05 pm
randomguy wrote:
Thu Sep 21, 2017 4:41 pm
Sure but now the chart is broken at the other end since it will underestimate your expenses (i.e. you are spending 500k and need 650k to account for taxes).
I'm not following - where did the $650K come from? If you are living on $500K and thus saving $100K, that's ~17% savings rate and sometime between 37 and 43 years is not unreasonable.

Having said that, I agree with KlangFool that saving and expense numbers are sufficient, and savings rate causes more confusion than it clarifies.
Taxes. You are spending 500k in retirement. To generate 500k of spendable money you need on the order of 650k of total income with a lot of caveats about how taxes for everyone are different. MMM (since we seems to be talking about him) tends to ignore taxes since he doesn't pay them:)
Simply going back to your original example:
1) I make 1 million/year
b) pay 400k in taxes
c) live on 25k500K
d) save 575k100K

Using those numbers, =NPER(5%,-100000,0,500000/4%) gives 40.6 years, just as MMM's post lists.
In 40.6 years, you will have enough money to generate 500k/year of income. But you don't need 500k/year of income. You need 500k/year of spendable money. Income and spendable money are rarely the same number when you get to high incomes:)

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Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 10:56 pm

teen persuasion wrote:
Thu Sep 21, 2017 10:40 pm
randomguy wrote:
Thu Sep 21, 2017 10:24 pm
teen persuasion wrote:
Thu Sep 21, 2017 10:16 pm
MossySF wrote:
Thu Sep 21, 2017 10:01 pm
Let''s not argue about details you don't have much control over (taxes). In a developed country, you will be taxed. Why even bother considering that part of your income when you never even see it in your bank account?
But I do have control over my taxes, thru the very act of saving in retirement accounts. If we do not save, our federal + state income tax would be $4420. When we do save, our federal + state refunds would be $5525. That's nearly $10k difference. I save that, too, to Roth IRAs.
But did you save on taxes or just defer them? That depends on your future expectations. I for one expect that the rootofgood blogers (140k income, o in taxes) are making a mistake by paying so little in taxes now. My guess is that they would be better contributing to a ROTH instead of tIRA and paying some more taxes in the 10% bracket. But there is a lot of guess work involved there.
That's a good question. General advice would have us fund Roth 401k over traditional, as we have been in low brackets, partially to zero with all of our traditional contributions. But the refundable credits create some interesting marginal tax rates in phaseout regions, and because our state proportionately matches them. The EITC phaseout rate is 21% the state match is 30% (so effectively 6.3%), state tax rate is 4% (never get to zero bracket there) and federal rate is mostly 10%, for a grand total of a 41.3% marginal rate. Even without the kids and all their exemptions in the future, I doubt we'll hit that high a rate in retirement drawdown.

The other side is that those refundable credits are funding more retirement contributions, not just avoided tax. So this approach increases our savings every year. As I put those in Roth, we are at least partially diversified by type. Our totals are roughly 1/3 Roth, 2/3 traditional at the moment. If we FIRE mid-fifties, we'll have time to Roth convert more before SS and RMDs at 70.

You can hit high rates from SS taxation or for an early retiree loss of ACA subsidies (granted technically those aren't a tax).You have to make a bunch of guesses and hope things work out. I am guessing anything to get a subsidy tends to work out in most cases. I love thinking about the 20k in taxes I save by doing a 401(k). I don't like thinking about the 12k or so I expect to pay in the future but when I am calculating where I am at retirement wise I make sure to factor in that I am going to be getting a good chunk of money that isn't taxed favorablely and will cause my SS to be taxed. Obviously you need to think about your own situation.

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Re: The Magic of Savings Rate

Post by randomizer » Thu Sep 21, 2017 11:53 pm

The MMM people are far too optimistic (recklessly so) IMO. In their 20s and 30s, planning to begin a 60-year retirement the day they hit 25x annual expenses, with not enough thought given to sequence of returns risk (the answer is that you do "side gigs"; never mind how hard they are to get during a recession). It all seems easy when all you've ever known is a bull market.

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Re: The Magic of Savings Rate

Post by FiveK » Fri Sep 22, 2017 12:46 am

randomguy wrote:
Thu Sep 21, 2017 10:43 pm
In 40.6 years, you will have enough money to generate 500k/year of income. But you don't need 500k/year of income. You need 500k/year of spendable money. Income and spendable money are rarely the same number when you get to high incomes:)
Ah, Ok, now we're converging.

Yes, taxes are not insignificant at that level and the MMM assumptions don't include them. One more reason to follow KlangFool and use "expenses" (including taxes) directly.

Coincidentally, our $1MM/yr earner might trade off mortgage payments ($1MM loan, 30 year at 4%, or ~$60K/yr) while earning for ~the same amount in taxes when retired, if a mega-backdoor Roth is available. If so, the same 40 year projection results. But that is coincidence, not design.

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Re: The Magic of Savings Rate

Post by #Cruncher » Fri Sep 22, 2017 2:03 am

KlangFool wrote:
Thu Sep 21, 2017 10:12 pm
Why do people choose to over complicate something simple? ...
  1. Find out your expense number that you aim for.
  2. Pick a number between 25X to 40X depending on the age Y when you want to FI or retire
  3. Pick your annual saving.
  4. Pick an AA and assume an annual return rate of 5% to 9%
  5. Use Excel to calculate whether you can reach your number in age Y.
  6. If the answer is no, go back to (3) and increase your saving.
Instead of calculating the years needed to work for a given savings rate, this algorithm determines the savings needed to retire in a given number of years. That's cool. But there is no need to do it iteratively as you suggest, Klangfool. You can do it directly with the Excel PMT function. For example assuming retirement expenses of $70,000, a multiplier of 25X, a 5% real return, and retirement in 28 years, one needs to save about $30,000 per year.

Code: Select all

29,964 = -PMT(5%, 28, 0, 25 * 70000, 0)
You can make it even simpler with the key assumption in the MMM blog post that expenses in retirement equal expenses while working. I.e., expense percent equals 100% minus savings percent. Here is a table showing how, given this assumption, savings percent can be expressed simply as a function of withdrawal rate (SWR), investment growth, and years to retirement. For example with a 4% withdrawal rate and 5% investment growth, retirement in 28 years requires saving 30%. This agrees with the $70,000 expense and $30,000 savings figures above (70% = 100% - 30%).

Code: Select all

Row  Col A      Col B   Col C   Col D   Col E   Col F   Col G   Col H
  1       /SWR     4%
  2  Years/Grow    0%      1%      2%      3%      4%      5%      6%

Code: Select all

  3    10         71%     70%     70%     69%     68%     67%     65%
  4    12         68%     66%     65%     64%     62%     61%     60%
  5    14         64%     63%     61%     59%     58%     56%     54%
  6    16         61%     59%     57%     55%     53%     51%     49%
  7    18         58%     56%     54%     52%     49%     47%     45%
  8    20         56%     53%     51%     48%     46%     43%     40%
  9    22         53%     51%     48%     45%     42%     39%     37%
 10    24         51%     48%     45%     42%     39%     36%     33%
 11    26         49%     46%     43%     39%     36%     33%     30%
 12    28         47%     44%     40%     37%     33%     30%     27%
 13    30         45%     42%     38%     34%     31%     27%     24%
 14    32         44%     40%     36%     32%     29%     25%     22%
 15    34         42%     38%     34%     30%     26%     23%     19%
 16    36         41%     37%     32%     28%     24%     21%     17%
 17    38         40%     35%     31%     27%     23%     19%     16%
 18    40         38%     34%     29%     25%     21%     17%     14%
 19    42         37%     33%     28%     23%     19%     16%     12%
 20    44         36%     31%     26%     22%     18%     14%     11%
 21    46         35%     30%     25%     21%     16%     13%     10%
 22    48         34%     29%     24%     19%     15%     12%      9%
 23    50         33%     28%     23%     18%     14%     11%      8%
Here is the formula entered in cell B3 and copied down to row 23 and right to column H. It uses the Excel FV function.

Code: Select all

B3: 71% = 1 / (1 + $B$1 * FV(B$2, $A3, -1, 0, 0))
This table is structured like the one in my previous post that solved for years instead of savings percent. For example, that table shows that with 5% growth and saving 30% one can retire in 28 years. This table shows that with 5% growth to retire in 28 years one must save 30%.

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Re: The Magic of Savings Rate

Post by KlangFool » Fri Sep 22, 2017 7:25 am

#Cruncher wrote:
Fri Sep 22, 2017 2:03 am
KlangFool wrote:
Thu Sep 21, 2017 10:12 pm
Why do people choose to over complicate something simple? ...
  1. Find out your expense number that you aim for.
  2. Pick a number between 25X to 40X depending on the age Y when you want to FI or retire
  3. Pick your annual saving.
  4. Pick an AA and assume an annual return rate of 5% to 9%
  5. Use Excel to calculate whether you can reach your number in age Y.
  6. If the answer is no, go back to (3) and increase your saving.
Instead of calculating the years needed to work for a given savings rate, this algorithm determines the savings needed to retire in a given number of years. That's cool. But there is no need to do it iteratively as you suggest, Klangfool. You can do it directly with the Excel PMT function. For example assuming retirement expenses of $70,000, a multiplier of 25X, a 5% real return, and retirement in 28 years, one needs to save about $30,000 per year.

Code: Select all

29,964 = -PMT(5%, 28, 0, 25 * 70000, 0)
#Cruncher,

<<You can make it even simpler with the key assumption>>

This is the whole point, we are not MMM blog. We do not want to make this kind of assumption. We want people to see the elephant in the room for this forum.

For example, how likely for somebody that wants to spend 70K in retirement and save 30K to be continuously employed for 28 years?

http://jimhighsmith.com/the-law-of-rasp ... -progress/
<< In his classic, The Secrets of Consulting, Jerry Weinberg offers us his Law of Raspberry Jam, “The wider you spread it, the thinner it gets.” >>

A blog is designed to spread as wide as possible. We are a forum. The goal is to educate a small group of people at a time. In many cases, specific to an individual and their unique circumstances.

KlangFool

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Re: The Magic of Savings Rate

Post by basspond » Fri Sep 22, 2017 8:28 am

The only things that this chart does is confirms the power of compound interest and shows the earlier you save the less you have to save. However, if a person makes $100k a year and only starts to save 2 years before retirement, they would have less then $200k! I'm glad I didn't follow this chart.

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Re: The Magic of Savings Rate

Post by Admiral » Fri Sep 22, 2017 9:17 am

Love MMM but he's no Boglehead (nor does he attempt to be). Bogleheads (if one had to generalize) do believe in simplicity, low expenses, and LBYM...but not extreme frugality.

The problem with the chart is that the less one makes, the more difficult it becomes to save a percentage that will achieve FI in any rate of time less than many decades. Perhaps as an individual with no dependents one can make 40k and live on 20k. Perhaps. Depends where/how one lives.

But the reality is that there is a floor at which one cannot cut expenses any more. Few 2BR apartments cost $250 a month. Median household income last year was $60,000 more or less. It's certainly possible that this family could save $9k (15%) and, after taxes, live on the rest. I just don't know that it's likely. It's definitely difficult.

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Re: The Magic of Savings Rate

Post by dk240t » Fri Sep 22, 2017 9:41 am

I think these shortcuts are great for EARLY planning.

I mean, planning for 30 or 40 years of savings - you have to make so many assumptions to get anywhere useful - and in the end, you get to the same result regardless.

teen persuasion
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Re: The Magic of Savings Rate

Post by teen persuasion » Fri Sep 22, 2017 12:54 pm

Admiral wrote:
Fri Sep 22, 2017 9:17 am
Love MMM but he's no Boglehead (nor does he attempt to be). Bogleheads (if one had to generalize) do believe in simplicity, low expenses, and LBYM...but not extreme frugality.

The problem with the chart is that the less one makes, the more difficult it becomes to save a percentage that will achieve FI in any rate of time less than many decades. Perhaps as an individual with no dependents one can make 40k and live on 20k. Perhaps. Depends where/how one lives.

But the reality is that there is a floor at which one cannot cut expenses any more. Few 2BR apartments cost $250 a month. Median household income last year was $60,000 more or less. It's certainly possible that this family could save $9k (15%) and, after taxes, live on the rest. I just don't know that it's likely. It's definitely difficult.
Sorry, have to comment on this perception that you can't save anything meaningful if you make median (or below!) income.

I believe we will just reach a household earned income of $60k this year, our highest ever. We are married and raising 5 kids (2 thru college and launched, 2 currently in college and partially launched, one in MS). We paid off our ugly 9.75% mortgage more than 15 years early. Also paid off our undergrad student loans, and DH's later grad loans (<$5k forgiven for teaching in an alternative school). I was SAHM for nearly 20 years until the youngest reached school age, so all the previous was done on one income, mostly <$35k. We expect to save $33k to retirement accounts this year, and essentially max the HSA as well.

Please stop discouraging people from LBYM and saving, because "it's just not possible at THAT income". It is possible, and it's more about cutting out the waste and spending wisely than it is about deprivation. You know, simplicity and low expenses. And a little bit of stepwise refinement: tweak withholdings, save 5% to get match, see it lowers tax bill (increases refund), tweak withholdings, double savings to 10%, cut out a bill (like student loans), double savings to 20%, rinse and repeat until maxing, find new bucket to fill...

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Re: The Magic of Savings Rate

Post by KlangFool » Fri Sep 22, 2017 1:01 pm

Admiral wrote:
Fri Sep 22, 2017 9:17 am
Love MMM but he's no Boglehead (nor does he attempt to be). Bogleheads (if one had to generalize) do believe in simplicity, low expenses, and LBYM...but not extreme frugality.

The problem with the chart is that the less one makes, the more difficult it becomes to save a percentage that will achieve FI in any rate of time less than many decades. Perhaps as an individual with no dependents one can make 40k and live on 20k. Perhaps. Depends where/how one lives.

But the reality is that there is a floor at which one cannot cut expenses any more. Few 2BR apartments cost $250 a month. Median household income last year was $60,000 more or less. It's certainly possible that this family could save $9k (15%) and, after taxes, live on the rest. I just don't know that it's likely. It's definitely difficult.
Admiral,

I disagreed. I used to make 1/4 of what I am making now. I save 30+% of my gross income at that income level too.

KlangFool

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Re: The Magic of Savings Rate

Post by Admiral » Fri Sep 22, 2017 2:12 pm

teen persuasion wrote:
Fri Sep 22, 2017 12:54 pm
Admiral wrote:
Fri Sep 22, 2017 9:17 am
Love MMM but he's no Boglehead (nor does he attempt to be). Bogleheads (if one had to generalize) do believe in simplicity, low expenses, and LBYM...but not extreme frugality.

The problem with the chart is that the less one makes, the more difficult it becomes to save a percentage that will achieve FI in any rate of time less than many decades. Perhaps as an individual with no dependents one can make 40k and live on 20k. Perhaps. Depends where/how one lives.

But the reality is that there is a floor at which one cannot cut expenses any more. Few 2BR apartments cost $250 a month. Median household income last year was $60,000 more or less. It's certainly possible that this family could save $9k (15%) and, after taxes, live on the rest. I just don't know that it's likely. It's definitely difficult.
Sorry, have to comment on this perception that you can't save anything meaningful if you make median (or below!) income.

I believe we will just reach a household earned income of $60k this year, our highest ever. We are married and raising 5 kids (2 thru college and launched, 2 currently in college and partially launched, one in MS). We paid off our ugly 9.75% mortgage more than 15 years early. Also paid off our undergrad student loans, and DH's later grad loans (<$5k forgiven for teaching in an alternative school). I was SAHM for nearly 20 years until the youngest reached school age, so all the previous was done on one income, mostly <$35k. We expect to save $33k to retirement accounts this year, and essentially max the HSA as well.

Please stop discouraging people from LBYM and saving, because "it's just not possible at THAT income". It is possible, and it's more about cutting out the waste and spending wisely than it is about deprivation. You know, simplicity and low expenses. And a little bit of stepwise refinement: tweak withholdings, save 5% to get match, see it lowers tax bill (increases refund), tweak withholdings, double savings to 10%, cut out a bill (like student loans), double savings to 20%, rinse and repeat until maxing, find new bucket to fill...
teen persuasion,
Don't put words in my mouth. I did not discourage anyone, I simply said it's difficult. You may be the exception, which is great. But guess what? Here is the reality:
Household Saving Rate in the United States decreased to 3.50 percent in July from 3.80 percent in June of 2017. Personal Savings in the United States averaged 8.31 percent from 1959 until 2017, reaching an all time high of 17 percent in May of 1975.
50% of US households have ZERO retirement savings. None.

You can take from that data whatever you want. What I take from it is that a high savings rate is difficult in the U.S. You can say people overspend, and I don't disagree; our economy is based on consumption. I also believe our taxation and benefits system favors the wealthy. You can disagree with that if you wish. But the numbers are the numbers.

Source: https://tradingeconomics.com/united-sta ... al-savings

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Re: The Magic of Savings Rate

Post by dspencer » Fri Sep 22, 2017 2:35 pm

Olemiss540 wrote:
Wed Sep 20, 2017 12:45 pm

Why does it seem this board is slanted towards the negative? Does it just seem more intelligent to slant towards pessimism or are that large a percentage of well financed individuals generally negative thinkers?

I personally find the thought behind MMM to be somewhat motivating. Pretty sure the savings rates discussed are to help motivate 10% savers to get to 40%, not 45% savers to 95%.
Cunninghams' Law: "the best way to get the right answer on the internet is not to ask a question; it's to post the wrong answer."

It's human nature to correct perceived falsehoods. People that agree are less likely to speak up since what is there to say? In this case, the best way to get the technically precise answer is to post a rule of thumb.

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Re: The Magic of Savings Rate

Post by aj76er » Fri Sep 22, 2017 2:37 pm

alfaspider wrote:
Wed Sep 20, 2017 12:44 pm
aristotelian wrote:
Wed Sep 20, 2017 12:38 pm
alfaspider wrote:
Wed Sep 20, 2017 9:44 am


I don't think the chart really works all that well at the outlier numbers. Even if my savings rate was 100%, I wouldn't be under two years from FI (I imagine that's true for most). Likewise, even if I only saved 5%, I'm fairly certain I could retire before I die (probably won't make it another 66 years!).
If your savings rate was 100%, that would mean that you have zero expenses. So yes, by definition you would be FI right now. Unfortunately most people at least need food and shelter.
Right, I understand it works mathematically- but not particularly applicable to any likely real-world scenario.
Keep in mind that costs can be zero or even negative. For examples:
* You grow your own food and sell the leftovers
* You own your home and rent out extra rooms in your house (Airbnb, roommate, etc)
* You live in a densley urban area and walk everywhere, even for shopping and groceries

These are pretty legitimate ways of eliminating some typically large expense categories such as food, housing, and transportation.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: The Magic of Savings Rate

Post by whatusername? » Fri Sep 22, 2017 3:56 pm

If you really want to look at it from a savings rate perspective, this article from the Journal of Financial Planning is about 10 years old but gives a pretty good idea for how to do it right: http://www.fiscalisadvisory.com/assets/ ... elines.pdf. It's not perfect, but pretty solid.

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Re: The Magic of Savings Rate

Post by teen persuasion » Fri Sep 22, 2017 4:07 pm

Admiral wrote:
Fri Sep 22, 2017 9:17 am
Love MMM but he's no Boglehead (nor does he attempt to be). Bogleheads (if one had to generalize) do believe in simplicity, low expenses, and LBYM...but not extreme frugality.

The problem with the chart is that the less one makes, the more difficult it becomes to save a percentage that will achieve FI in any rate of time less than many decades. Perhaps as an individual with no dependents one can make 40k and live on 20k. Perhaps. Depends where/how one lives.

But the reality is that there is a floor at which one cannot cut expenses any more. Few 2BR apartments cost $250 a month. Median household income last year was $60,000 more or less. It's certainly possible that this family could save $9k (15%) and, after taxes, live on the rest. I just don't know that it's likely. It's definitely difficult.
Sorry if I misread your intent. It sounded pretty discouraging to me, and I know it's very possible, so I inferred it could definitely discourage those who weren't yet saving, or much.


I do agree that few people, of all income levels, are saving at all. It saddens me, so I'm trying to be an example for others, to encourage them to begin.

As for the tax system, I've found it has some nice credits to encourage lower income people to save. I'm making the best use of them that I can - they helped pay down my mortgage, and now fund our Roth IRAs - extra income we wouldn't be eligible for if we didn't save in the correct type of retirement accounts.

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Re: The Magic of Savings Rate

Post by KlangFool » Sat Sep 23, 2017 10:30 am

Folks,

It is very simple but hard.

1) Average American at all income level saves nothing.

2) So, if you want to save money, do not live like average American at your income level. Live like the average American at one income level below you. Then, you could save money.

3) The key question is where you live. If you live where the average American at your income level is living, you would not save money. The daily pressure of living among the Jones will make sure of that.

In my neighborhood of annual median income of 150K. The average folks buy a 500K to 600K house as soon as their income reached above 100K. Then, they could not contribute to their tax-deferred account.

A) They could not save money even if they drive a used car and brown bag their lunches everyday.

B) They could not contribute to their tax-deferred account. They pay a lot of taxes. At 25% to 28% marginal tax rate and 5.75% state income tax, they are paying 30+% tax for their extra housing expenses.

If they are lucky and continuously employed, their children ended up with the student loans. If one or both members of the household was unemployed for any significant amount of time, they lose their houses.

Among all my children's high school classmates, we are only the only few that did not burden our children with a student loan. But, we live in the 300K to 400K (below median) house section of this neighborhood. And, we only buy our 300K to 400K house when our investment is significantly larger than the house price.

It is where you live. Then, almost nothing else matters for most people.

KlangFool

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Re: The Magic of Savings Rate

Post by am » Sat Sep 23, 2017 11:14 am

KlangFool wrote:
Sat Sep 23, 2017 10:30 am
Folks,

It is very simple but hard.

1) Average American at all income level saves nothing.

2) So, if you want to save money, do not live like average American at your income level. Live like the average American at one income level below you. Then, you could save money.

3) The key question is where you live. If you live where the average American at your income level is living, you would not save money. The daily pressure of living among the Jones will make sure of that.

In my neighborhood of annual median income of 150K. The average folks buy a 500K to 600K house as soon as their income reached above 100K. Then, they could not contribute to their tax-deferred account.

A) They could not save money even if they drive a used car and brown bag their lunches everyday.

B) They could not contribute to their tax-deferred account. They pay a lot of taxes. At 25% to 28% marginal tax rate and 5.75% state income tax, they are paying 30+% tax for their extra housing expenses.

If they are lucky and continuously employed, their children ended up with the student loans. If one or both members of the household was unemployed for any significant amount of time, they lose their houses.

Among all my children's high school classmates, we are only the only few that did not burden our children with a student loan. But, we live in the 300K to 400K (below median) house section of this neighborhood. And, we only buy our 300K to 400K house when our investment is significantly larger than the house price.

It is where you live. Then, almost nothing else matters for most people.

KlangFool

Very true. Live below your means. Sometimes when things are well, I do think why live below our means, but usually come to my senses.

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Re: The Magic of Savings Rate

Post by #Cruncher » Sat Sep 23, 2017 12:38 pm

KlangFool wrote:
Fri Sep 22, 2017 7:25 am
#Cruncher,
#Cruncher wrote:
Fri Sep 22, 2017 2:03 am
You can make it even simpler with the key assumption [in the MMM blog post that expenses in retirement equal expenses while working.]
This is the whole point, we are not MMM blog. We do not want to make this kind of assumption.
It's rather presumptuous, Klangfool, to say what "We" do not want. If you think the assumption is too simple to use, that's your business. But others may disagree. (I actually agree that MMM's method is too simple. [*] But I like its elegant simplicity anyway, and believe that others might wish to use it as a rough guide.)
KlangFool in same post wrote:We are a forum. The goal is to educate a small group of people at a time. In many cases, specific to an individual and their unique circumstances.
Again you're being presumptuous, Klangfool, saying what "The" goal of the forum is. I agree that one of the goals should be to help the original (and other) posters with specific questions. But certainly we should also be allowed to elaborate on general issues like saving for retirement.

Continuing that elaboration, here is the third table of a trilogy based on the "key assumption in the MMM blog post". All of them assume a 4% withdrawal rate (SWR) and then
  • The 1st table (in this post) shows years of saving required given savings percent and investment return.
  • The 2nd table (in this post) shows savings percent required given years of saving and investment return.
  • This table shows investment return required given years of saving and savings percent.

Code: Select all

Row  Col A     Col B   Col C   Col D   Col E   Col F   Col G   Col H   Col I   Col J   Col K
  1      /SWR    4%
  2 Years/Save   5%     10%     15%     20%     25%     30%     35%     40%     45%     50%

Code: Select all

  3    10      81.5%   64.7%   54.7%   47.4%   41.5%   36.3%   31.7%   27.4%   23.3%   19.2% 
  4    12      60.3%   47.8%   40.3%   34.7%   30.1%   26.2%   22.5%   19.1%   15.8%   12.6% 
  5    14      47.3%   37.4%   31.3%   26.8%   23.1%   19.8%   16.8%   14.0%   11.2%    8.4% 
  6    16      38.5%   30.3%   25.3%   21.5%   18.3%   15.5%   12.9%   10.5%    8.1%    5.7% 
  7    18      32.3%   25.3%   20.9%   17.7%   14.9%   12.4%   10.2%    8.0%    5.9%    3.7% 
  8    20      27.7%   21.5%   17.7%   14.8%   12.3%   10.2%    8.1%    6.2%    4.2%    2.3% 
  9    22      24.1%   18.6%   15.2%   12.6%   10.4%    8.4%    6.6%    4.8%    3.0%    1.2% 
 10    24      21.2%   16.3%   13.2%   10.9%    8.8%    7.0%    5.3%    3.7%    2.0%    0.4% 
 11    26      18.9%   14.5%   11.6%    9.4%    7.6%    5.9%    4.3%    2.8%    1.3%   (0.3%)
 12    28      17.0%   12.9%   10.3%    8.3%    6.6%    5.0%    3.5%    2.1%    0.6%   (0.9%)
 13    30      15.4%   11.6%    9.2%    7.3%    5.7%    4.2%    2.8%    1.5%    0.1%   (1.3%)
 14    32      14.1%   10.5%    8.3%    6.5%    5.0%    3.6%    2.3%    1.0%   (0.3%)  (1.7%)
 15    34      12.9%    9.6%    7.5%    5.8%    4.4%    3.1%    1.8%    0.6%   (0.7%)  (2.0%)
 16    36      11.9%    8.8%    6.8%    5.2%    3.8%    2.6%    1.4%    0.2%   (1.0%)  (2.2%)
 17    38      11.0%    8.1%    6.2%    4.7%    3.4%    2.2%    1.1%   (0.1%)  (1.2%)  (2.4%)
 18    40      10.3%    7.5%    5.6%    4.2%    3.0%    1.8%    0.7%   (0.3%)  (1.4%)  (2.6%)
 19    42       9.6%    6.9%    5.2%    3.8%    2.6%    1.5%    0.5%   (0.6%)  (1.6%)  (2.8%)
 20    44       9.0%    6.4%    4.8%    3.5%    2.3%    1.3%    0.2%   (0.8%)  (1.8%)  (2.9%)
 21    46       8.4%    6.0%    4.4%    3.1%    2.0%    1.0%    0.0%   (0.9%)  (1.9%)  (3.0%)
 22    48       7.9%    5.6%    4.1%    2.8%    1.8%    0.8%   (0.1%)  (1.1%)  (2.1%)  (3.1%)
 23    50       7.5%    5.2%    3.8%    2.6%    1.6%    0.6%   (0.3%)  (1.2%)  (2.2%)  (3.2%)
For example, to retire after 28 years saving 30% one needs a 5.0% investment return. Note that with enough years savings and a large enough savings percent one could retire even with a zero or negative real return. For example, even a -0.3% real return would allow one to retire after 26 years of saving 50%. Here is the formula in cell B3 that is copied down to row 23 and right to column K. It uses the Excel RATE function:

Code: Select all

B3: 81.5% = RATE($A3, -B$2, 0, (1 - B$2) / $B$1, 0, 25%)
* For a more accurate (and more complicated) alternative, see my 2nd post in longinvest's thread, The Mathematics of Retirement Investing. It presents a spreadsheet with 8 assumptions and 15 formulas to calculate the savings necessary for retirement.

smitcat
Posts: 676
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Re: The Magic of Savings Rate

Post by smitcat » Sat Sep 23, 2017 1:13 pm

KlangFool wrote:
Sat Sep 23, 2017 10:30 am
Folks,

It is very simple but hard.

1) Average American at all income level saves nothing.

2) So, if you want to save money, do not live like average American at your income level. Live like the average American at one income level below you. Then, you could save money.

3) The key question is where you live. If you live where the average American at your income level is living, you would not save money. The daily pressure of living among the Jones will make sure of that.

In my neighborhood of annual median income of 150K. The average folks buy a 500K to 600K house as soon as their income reached above 100K. Then, they could not contribute to their tax-deferred account.

A) They could not save money even if they drive a used car and brown bag their lunches everyday.

B) They could not contribute to their tax-deferred account. They pay a lot of taxes. At 25% to 28% marginal tax rate and 5.75% state income tax, they are paying 30+% tax for their extra housing expenses.

If they are lucky and continuously employed, their children ended up with the student loans. If one or both members of the household was unemployed for any significant amount of time, they lose their houses.

Among all my children's high school classmates, we are only the only few that did not burden our children with a student loan. But, we live in the 300K to 400K (below median) house section of this neighborhood. And, we only buy our 300K to 400K house when our investment is significantly larger than the house price.

It is where you live. Then, almost nothing else matters for most people.

KlangFool
FWIW - We have lived these past 25 years in a neighborhood where most folks make quite a bot of money and likely most do not save too much.
Many of the homes here are 2-3 times the size and value of ours but that had/has little to do with how we plan and live ourselves.

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vitaflo
Posts: 792
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Re: The Magic of Savings Rate

Post by vitaflo » Sat Sep 23, 2017 1:39 pm

The reason MMM's formula is simple is because it's trying to explain a simple concept. That savings rate has a larger influence on retirement timelines than just income does. That's it. If you're looking into it any more than that you're wasting your time and missing the point. I've shown dozens of people this MMM post and they all had an "aha!" moment that they didn't have before. That's the point right there and that's all.

Sometimes I wonder if BH just wants to argue technicalities endlessly and are missing the forrest for the trees.

Coachrhino11
Posts: 130
Joined: Mon Aug 28, 2017 12:02 pm

Re: The Magic of Savings Rate

Post by Coachrhino11 » Sat Sep 23, 2017 2:05 pm

teen persuasion wrote:
Thu Sep 21, 2017 6:47 am
norciom wrote:
Thu Sep 21, 2017 12:17 am
What is normal and what is impossible is largly defined by the people you know. Change the social group and your definition of normal will change.

As a group, it feels strange to see you make fun of people with savings rate under 10% and their reasons why they don't save more and turn around and make fun of people with saving rates above 60% and use suspiciously similar arguments that it can't be done.
+1

Glad I'm not the only one to have noticed this.


Discussions like this and the low income Bogleheads thread really display the inherent differences between the Boglehead community and the MMM community views. It seems Bogleheads wish to save enough to be FI (15%), by lowering investment expenses, to maximize their income for spending, while continuing to work until a standard retirement age of ~65. Mustachians wish to save as much as possible, by lowering expenses everywhere, in order to reach FIRE as soon as possible. Thus each has a different goal: Bogleheads maxing money to spend, Mustachians maxing time to spend.
I read both, and believe there's a happy medium. Many feel they must be extreme. Example, I have a T. Rowe Price closed fund that has higher ER but kicks butt just about every year. Index funds are great, but there's a road for all who have desire. MMM is way too extreme. Cars are evil, everyone should pedal to work, super annoying.

JGoneRiding
Posts: 987
Joined: Tue Jul 15, 2014 3:26 pm

Re: The Magic of Savings Rate

Post by JGoneRiding » Sat Sep 23, 2017 2:36 pm

smitcat wrote:
Sat Sep 23, 2017 1:13 pm
KlangFool wrote:
Sat Sep 23, 2017 10:30 am
Folks,

It is very simple but hard.

1) Average American at all income level saves nothing.

2) So, if you want to save money, do not live like average American at your income level. Live like the average American at one income level below you. Then, you could save money.

3) The key question is where you live. If you live where the average American at your income level is living, you would not save money. The daily pressure of living among the Jones will make sure of that.

In my neighborhood of annual median income of 150K. The average folks buy a 500K to 600K house as soon as their income reached above 100K. Then, they could not contribute to their tax-deferred account.

A) They could not save money even if they drive a used car and brown bag their lunches everyday.

B) They could not contribute to their tax-deferred account. They pay a lot of taxes. At 25% to 28% marginal tax rate and 5.75% state income tax, they are paying 30+% tax for their extra housing expenses.

If they are lucky and continuously employed, their children ended up with the student loans. If one or both members of the household was unemployed for any significant amount of time, they lose their houses.

Among all my children's high school classmates, we are only the only few that did not burden our children with a student loan. But, we live in the 300K to 400K (below median) house section of this neighborhood. And, we only buy our 300K to 400K house when our investment is significantly larger than the house price.

It is where you live. Then, almost nothing else matters for most people.

KlangFool
FWIW - We have lived these past 25 years in a neighborhood where most folks make quite a bot of money and likely most do not save too much.
Many of the homes here are 2-3 times the size and value of ours but that had/has little to do with how we plan and live ourselves.
Klangfool--I actually think you might like MMM if you gave him a chance. Yes he simplifies things, but can I tell you how many "normal" people don't save at all for the simple reason they find it complicated? Making it easier sounding can help a LOT of people get started and getting started is the first step right.

But back to why I think you might like him. Like you his big thing is in fact housing. He preaches over and over again about how people sink themselves by overspending on housing more than any other thing. And he gives tons of examples. He actually thinks everyone should live as close to work as possible then they should bike/walk/public transportation until they can actually afford more. He does argue that in many circumstances it makes sense to pay a little more for housing where you have min commute then less housing more commute.

KlangFool
Posts: 6987
Joined: Sat Oct 11, 2008 12:35 pm

Re: The Magic of Savings Rate

Post by KlangFool » Sat Sep 23, 2017 9:46 pm

JGoneRiding wrote:
Sat Sep 23, 2017 2:36 pm
smitcat wrote:
Sat Sep 23, 2017 1:13 pm
KlangFool wrote:
Sat Sep 23, 2017 10:30 am
Folks,

It is very simple but hard.

1) Average American at all income level saves nothing.

2) So, if you want to save money, do not live like average American at your income level. Live like the average American at one income level below you. Then, you could save money.

3) The key question is where you live. If you live where the average American at your income level is living, you would not save money. The daily pressure of living among the Jones will make sure of that.

In my neighborhood of annual median income of 150K. The average folks buy a 500K to 600K house as soon as their income reached above 100K. Then, they could not contribute to their tax-deferred account.

A) They could not save money even if they drive a used car and brown bag their lunches everyday.

B) They could not contribute to their tax-deferred account. They pay a lot of taxes. At 25% to 28% marginal tax rate and 5.75% state income tax, they are paying 30+% tax for their extra housing expenses.

If they are lucky and continuously employed, their children ended up with the student loans. If one or both members of the household was unemployed for any significant amount of time, they lose their houses.

Among all my children's high school classmates, we are only the only few that did not burden our children with a student loan. But, we live in the 300K to 400K (below median) house section of this neighborhood. And, we only buy our 300K to 400K house when our investment is significantly larger than the house price.

It is where you live. Then, almost nothing else matters for most people.

KlangFool
FWIW - We have lived these past 25 years in a neighborhood where most folks make quite a bot of money and likely most do not save too much.
Many of the homes here are 2-3 times the size and value of ours but that had/has little to do with how we plan and live ourselves.
Klangfool--I actually think you might like MMM if you gave him a chance. Yes he simplifies things, but can I tell you how many "normal" people don't save at all for the simple reason they find it complicated? Making it easier sounding can help a LOT of people get started and getting started is the first step right.

But back to why I think you might like him. Like you his big thing is in fact housing. He preaches over and over again about how people sink themselves by overspending on housing more than any other thing. And he gives tons of examples. He actually thinks everyone should live as close to work as possible then they should bike/walk/public transportation until they can actually afford more. He does argue that in many circumstances it makes sense to pay a little more for housing where you have min commute then less housing more commute.
JGoneRiding,

<< Klangfool--I actually think you might like MMM if you gave him a chance. Yes he simplifies things, >>

He has nothing of value to offer me. I know all those stuff.

<<but can I tell you how many "normal" people don't save at all for the simple reason they find it complicated? >>

1) For my peers, once they overspend on the house, it is too late. It has nothing to do with whether it is overcomplicated to save. They tried to save money by brown bagging their lunches and drive a used car, it won't matter anyhow.

2) When those young professionals started with a good paying job, they believe that they will be fully-employed over the next 20 to 30 years. And, their pay could only go up. Then, you throw in real estate agents and everyone else with their own self-interest to sell more houses and collect more commissions, it is given that most folks will overspend on houses. Then, their saving rate will be close to 0%.

3) Then, a recession hit like clockwork. It is at least once every 10 years since 1836. Many of them will be wiped up.

4) The cycle repeats itself.

The last recession was 2007/2009. It is enough time for people to forget and repeat the same mistake again.

KlangFool

P.S.: I cannot teach my saving attitude anyhow. I came from a culture/country where the average gross saving rate is 30+%. It is normal to save and live on 1/3 of your gross income. If I am born and raised in an American culture, I may save nothing too.

supersecretname
Posts: 49
Joined: Tue Sep 01, 2015 2:33 pm

Re: The Magic of Savings Rate

Post by supersecretname » Sun Sep 24, 2017 7:48 am

vitaflo wrote:
Sat Sep 23, 2017 1:39 pm
The reason MMM's formula is simple is because it's trying to explain a simple concept. That savings rate has a larger influence on retirement timelines than just income does. That's it. If you're looking into it any more than that you're wasting your time and missing the point. I've shown dozens of people this MMM post and they all had an "aha!" moment that they didn't have before. That's the point right there and that's all.

Sometimes I wonder if BH just wants to argue technicalities endlessly and are missing the forrest for the trees.
+1

It is a struggle for most people to increase their income (and if they do, cue lifestyle creep). By focusing on lowering expenses, "normal" people can see a light at the end of the tunnel.

Gadget
Posts: 89
Joined: Fri Mar 17, 2017 1:38 pm

Re: The Magic of Savings Rate

Post by Gadget » Sun Sep 24, 2017 7:30 pm

I like the mmm savings rate table. It is easier for the average person to understand I think. Mostly because so many people only save based on a 401k savings rate from their salary.

Yes, I know there are more accurate ways to measure it. I'd rather go the boggleheads calculation method for myself discussed in this thread and calculate my spending. But if I'm at work talking to someone who obviously isn't saving enough, then a savings rate associated with years to retirement is something anyone can understand. They likely aren't even aware enough of their own spending to track it. And maybe if they see that they need to up their savings rate, they'll have to start figuring out the more important question of how to reduce spending.

I am not near as frugal as mmm, but he does make important points really well for the average person. Because the average (US) person lives way beyond their means.

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tfb
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Re: The Magic of Savings Rate

Post by tfb » Sun Sep 24, 2017 7:57 pm

The table should be read together with this chart:

Image

Source: CHART OF THE DAY: Rich People Really Love To Save Their Money, Sam Ro, Business Insider, Mar. 1, 2013

At higher income levels, savings rate naturally goes up. It has double benefits of both shortening the years to retirement and affording a higher living standard in retirement.
Harry Sit, taking a break from the forums.

PopMegaphone
Posts: 4
Joined: Sun Apr 30, 2017 12:34 am

Re: The Magic of Savings Rate

Post by PopMegaphone » Sun Sep 24, 2017 11:49 pm

vitaflo wrote:
Sat Sep 23, 2017 1:39 pm
The reason MMM's formula is simple is because it's trying to explain a simple concept. That savings rate has a larger influence on retirement timelines than just income does. That's it. If you're looking into it any more than that you're wasting your time and missing the point. I've shown dozens of people this MMM post and they all had an "aha!" moment that they didn't have before. That's the point right there and that's all.

Sometimes I wonder if BH just wants to argue technicalities endlessly and are missing the forrest for the trees.
Exactly. I have some small quibbles with how MMM presents some things, but he does a great job of arguing some simple, but extremely important, financial concepts.

He has motivated me to try and save a bit more with a possible plan for retirement or a future job that may pay less, but is more rewarding.

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