The Magic of Savings Rate

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heybro
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Joined: Thu May 12, 2016 9:17 pm

The Magic of Savings Rate

Post by heybro » Tue Sep 19, 2017 5:42 pm

So, is it really not how much you earn but how much you save?

Savings Rate (Percent), Working Years Until Retirement
5% 66yrs
10 51
15 43
20 37
25% 32yrs
30 28
35 25
40 22
45 19
50% 17yrs
55 14.5
60 12.5
65 10.5
70 8.5
75% 7yrs
80 5.5
85 4
90 under 3
95% under 2yrs

tj
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Re: The Magic of Savings Rate

Post by tj » Tue Sep 19, 2017 5:46 pm

Its incredibly simplicistic. Who is starting from 0? Who has identical expenses every year?

mhalley
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Re: The Magic of Savings Rate

Post by mhalley » Tue Sep 19, 2017 5:52 pm

So this appears to be MMM shockingly simple math for early retirement. He has numerous assumptions to come up with this, i.e., 5% return on investments, 4% swr, etc.
the numbers would change based on the return and swr and starting portfolio size. Here is the original post:

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

He has a link to the spreadsheet he used to get the numbers if you want to play with them.
Here is a similar post with a table for 6% return, and a google sheets link
http://the-military-guide.com/how-many- ... pendent-2/


SAVINGS RATE % --YEARS TO FI
15 --------------------------39
30 --------------------------26
40 --------------------------20
50 --------------------------16
60 --------------------------12
70 ---------------------------9
80 --------------------------5.5

ohmygodabear
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Re: The Magic of Savings Rate

Post by ohmygodabear » Tue Sep 19, 2017 6:34 pm

People with high incomes can choose to barely save at all and still retire in comfort. What savings rate does someone with 500k earnings need to ensure they will have a nice retirement and remain in the top 10% of households, in absolute terms? 10%? 5%? Sure, their standard of living takes a hit, but they are still better off financially than a 40k earner who saved 50% of their income.

The math is what it is. There is no "magic", no "secret". Earning more gives you the choice to save more than people who earn less, and there is a threshold at which it is trivially easy to avoid homelessness, medical bankruptcy, and acts of god are unlikely to leave you desperate.

It is also true that you can squander a fortune, just ask MC Hammer.

avalpert
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Re: The Magic of Savings Rate

Post by avalpert » Tue Sep 19, 2017 7:11 pm

heybro wrote:
Tue Sep 19, 2017 5:42 pm
So, is it really not how much you earn but how much you save?
Savings is a function of earnings and spend - if you earn more and hold spend constant you save more.

hiddensee
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Re: The Magic of Savings Rate

Post by hiddensee » Tue Sep 19, 2017 7:16 pm

ohmygodabear wrote:
Tue Sep 19, 2017 6:34 pm
People with high incomes can choose to barely save at all and still retire in comfort. What savings rate does someone with 500k earnings need to ensure they will have a nice retirement and remain in the top 10% of households, in absolute terms? 10%? 5%? Sure, their standard of living takes a hit, but they are still better off financially than a 40k earner who saved 50% of their income.
The problem here is that dropping from $450k/year spending to $50k/year spending will feel catastrophic even though $50k/year is still a very nice income as far as many are concerned. On the other hand if you can really live on $20k/year while working you can still live on $20k/year while retired. The time to retirement drops so fast not just because of greater savings rate, but because lower spending rate means less money is required.

staythecourse
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Re: The Magic of Savings Rate

Post by staythecourse » Tue Sep 19, 2017 7:21 pm

heybro wrote:
Tue Sep 19, 2017 5:42 pm
So, is it really not how much you earn but how much you save?
I really do not like simple math to answer complex questions as it is never correct.

IF one is going to use a simple formula I would say the best one is the one from, I believe, Wade Pfau who has a table of years to retirement, saving %, and number of years you want the portfolio to last, i.e. ER. I am sure someone will be kind enough link it soon.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

GoldenFinch
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Re: The Magic of Savings Rate

Post by GoldenFinch » Tue Sep 19, 2017 7:40 pm

My rule of thumb is save as much as you can comfortably afford. It you don't think it's going to be enough, be a little uncomfortable for a while and save a bit more.

Olemiss540
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Re: The Magic of Savings Rate

Post by Olemiss540 » Tue Sep 19, 2017 7:46 pm

ohmygodabear wrote:
Tue Sep 19, 2017 6:34 pm
Earning more gives you the choice to save more than people who earn less, and there is a threshold at which it is trivially easy to avoid homelessness, medical bankruptcy, and acts of god are unlikely to leave you desperate.
I think the premise behind these savings rate calculations are to show people that no matter your income, your savings PERCENTAGE is what drives the path to financial independence. NOT being in the top 10% wealthiest Americans.

ohmygodabear
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Re: The Magic of Savings Rate

Post by ohmygodabear » Tue Sep 19, 2017 7:52 pm

Olemiss540 wrote:
Tue Sep 19, 2017 7:46 pm
ohmygodabear wrote:
Tue Sep 19, 2017 6:34 pm
Earning more gives you the choice to save more than people who earn less, and there is a threshold at which it is trivially easy to avoid homelessness, medical bankruptcy, and acts of god are unlikely to leave you desperate.
I think the premise behind these savings rate calculations are to show people that no matter your income, your savings PERCENTAGE is what drives the path to financial independence. NOT being in the top 10% wealthiest Americans.
Yes, and I disagree entirely with that premise. FI is about having choices. Once you reach a certain financial point, you are FI, even if in practice that would mean making a choice to reduce your spending.

FI does not mean "maintain current spending forever", it means having a choice to walk away from active income sources.
Last edited by ohmygodabear on Tue Sep 19, 2017 7:56 pm, edited 1 time in total.

randomguy
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Re: The Magic of Savings Rate

Post by randomguy » Tue Sep 19, 2017 7:55 pm

hiddensee wrote:
Tue Sep 19, 2017 7:16 pm
ohmygodabear wrote:
Tue Sep 19, 2017 6:34 pm
People with high incomes can choose to barely save at all and still retire in comfort. What savings rate does someone with 500k earnings need to ensure they will have a nice retirement and remain in the top 10% of households, in absolute terms? 10%? 5%? Sure, their standard of living takes a hit, but they are still better off financially than a 40k earner who saved 50% of their income.
The problem here is that dropping from $450k/year spending to $50k/year spending will feel catastrophic even though $50k/year is still a very nice income as far as many are concerned. On the other hand if you can really live on $20k/year while working you can still live on $20k/year while retired. The time to retirement drops so fast not just because of greater savings rate, but because lower spending rate means less money is required.

Going from 450k to 50k FEELS catastrophic. Going from 50k of spending to 6k IS catastrophic. :) There is a lot more flexibility in have high expenses and being able to cut versus having low expenses but they are all essential. Giving up the horse is emotionally painful. Not being able to afford medical care is physically painful.


Yes the key to getting to FI is to minimize spending while maximizing income. But very, very few people have getting to FI as soon as possible as one of their goals. Most have lifestyle goals they need to do to balance out with having to spend time working.

Grt2bOutdoors
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Location: New York

Re: The Magic of Savings Rate

Post by Grt2bOutdoors » Tue Sep 19, 2017 7:56 pm

GoldenFinch wrote:
Tue Sep 19, 2017 7:40 pm
My rule of thumb is save as much as you can comfortably afford. It you don't think it's going to be enough, be a little uncomfortable for a while and save a bit more.
+1
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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FiveK
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Re: The Magic of Savings Rate

Post by FiveK » Tue Sep 19, 2017 7:58 pm

See the Excel NPER function:

rate - your assumed annual real return on invested money.
pmt - the amount you expect to save each year (use the negative value for Excel).
pv - the amount you have invested already (use the negative value for Excel).
[fv] - the amount you expect to need. E.g., (annual retirement spending) / 4%.

Certainly doesn't account for non-constant saving or spending, but it shows simple assumptions laid bare.

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rocket354
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Re: The Magic of Savings Rate

Post by rocket354 » Tue Sep 19, 2017 8:13 pm

heybro wrote:
Tue Sep 19, 2017 5:42 pm
So, is it really not how much you earn but how much you save?

Savings Rate (Percent), Working Years Until Retirement
5% 66yrs
10 51
15 43
20 37
25% 32yrs
30 28
35 25
40 22
45 19
50% 17yrs
55 14.5
60 12.5
65 10.5
70 8.5
75% 7yrs
80 5.5
85 4
90 under 3
95% under 2yrs
I would say it's both what you make and what you save. If someone makes $100k/year, they can't really have a 95% savings rate. That would require them to live on $5k a year, and even then, be willing to continue to live on $5k/year indefinitely in order to stay retired. Someone making $1mm/year then only has to live on $50k/year and be willing to continue living on it. In short, to get anywhere near the bottom of that chart, it very much is a function of how much you make.

KlangFool
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Re: The Magic of Savings Rate

Post by KlangFool » 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

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#Cruncher
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Re: The Magic of Savings Rate

Post by #Cruncher » Tue Sep 19, 2017 10:14 pm

mhalley wrote:
Tue Sep 19, 2017 5:52 pm
So this appears to be MMM [Mr Money Mustache] shockingly simple math for early retirement. He has numerous assumptions to come up with this, i.e., 5% return on investments, 4% swr, etc.
The key assumption -- the one that makes it so simple (and so elegant) -- is that one will spend in retirement what one spends while working. For example, if one is saving 10%, one needs to accumulate twice as much as if one is saving 55% (90% = 2 X 45%). So, ignoring investment growth, one has to work not 5-1/2 times as long but 11 times as long.
mhalley in same post wrote:He has a link to the spreadsheet he used to get the numbers if you want to play with them.
The spreadsheet referenced in the Mr Money article is in OpenOffice format (.ods) that I can't open with Excel. However, one can easily construct such a spreadsheet using just one formula [*] based on the Excel NPER function (mentioned above by FiveK). Here is a table illustrating this for growth rates of 0% to 6% and savings rates of 5% to 95%:

Code: Select all

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

Code: Select all

  3    5%       475.0   175.8   118.7    92.2    76.4    65.8    58.1
  4   10%       225.0   118.5    86.1    69.3    58.7    51.4    45.9
  5   15%       141.7    88.7    67.9    56.1    48.4    42.8    38.6
  6   20%       100.0    69.7    55.5    46.9    41.0    36.7    33.4
  7   25%        75.0    56.2    46.3    39.9    35.3    31.9    29.3
  8   30%        58.3    46.2    39.0    34.2    30.7    28.0    25.8
  9   35%        46.4    38.3    33.2    29.5    26.8    24.6    22.8
 10   40%        37.5    32.0    28.3    25.5    23.4    21.6    20.2
 11   45%        30.6    26.8    24.1    22.0    20.4    19.0    17.9
 12   50%        25.0    22.4    20.5    18.9    17.7    16.6    15.7
 13   55%        20.5    18.7    17.3    16.2    15.2    14.4    13.7
 14   60%        16.7    15.5    14.5    13.7    13.0    12.4    11.9
 15   65%        13.5    12.7    12.0    11.5    11.0    10.5    10.2
 16   70%        10.7    10.2     9.8     9.4     9.1     8.8     8.5
 17   75%         8.3     8.0     7.8     7.5     7.3     7.1     7.0
 18   80%         6.2     6.1     5.9     5.8     5.7     5.6     5.5
 19   85%         4.4     4.3     4.3     4.2     4.1     4.1     4.0
 20   90%         2.8     2.8     2.7     2.7     2.7     2.7     2.6
 21   95%         1.3     1.3     1.3     1.3     1.3     1.3     1.3
* Here is the formula. The 2nd representation is entered into cell B3 above and copied down to row 21 and right to column H:

Code: Select all

years = NPER(growth rate, -savings rate, 0, (1 - savings rate) / SWR,  0)
475.0 = NPER(B$2,         -$A3,          0, (1 - $A3)          / $B$1, 0)
475.0 = NPER(0%,          -5%,           0,  95%               / 4%,   0)

alfaspider
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Re: The Magic of Savings Rate

Post by alfaspider » Wed Sep 20, 2017 9:44 am

heybro wrote:
Tue Sep 19, 2017 5:42 pm
So, is it really not how much you earn but how much you save?

Savings Rate (Percent), Working Years Until Retirement
5% 66yrs
10 51
15 43
20 37
25% 32yrs
30 28
35 25
40 22
45 19
50% 17yrs
55 14.5
60 12.5
65 10.5
70 8.5
75% 7yrs
80 5.5
85 4
90 under 3
95% under 2yrs
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!).

lazydavid
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Re: The Magic of Savings Rate

Post by lazydavid » Wed Sep 20, 2017 10:23 am

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!).
It actually works just fine. If you're saving 95% of your income, that means you're living off of 5%. Ergo each year of savings=19 years of expenses. Do that for 2 years, and you've got 38 years' worth of retirement savings, at 0% real return.

alfaspider
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Re: The Magic of Savings Rate

Post by alfaspider » Wed Sep 20, 2017 12:05 pm

lazydavid wrote:
Wed Sep 20, 2017 10:23 am
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!).
It actually works just fine. If you're saving 95% of your income, that means you're living off of 5%. Ergo each year of savings=19 years of expenses. Do that for 2 years, and you've got 38 years' worth of retirement savings, at 0% real return.
I would posit doing such a thing would not be sustainable in any realistic scenario.

avalpert
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Re: The Magic of Savings Rate

Post by avalpert » Wed Sep 20, 2017 12:30 pm

lazydavid wrote:
Wed Sep 20, 2017 10:23 am
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!).
It actually works just fine. If you're saving 95% of your income, that means you're living off of 5%. Ergo each year of savings=19 years of expenses. Do that for 2 years, and you've got 38 years' worth of retirement savings, at 0% real return.
Sure, if you assume you are starting from point zero, costs stay the same (ahem, taxes), and there are no other means of spending (be it existing resources or debt). In other words, it an elegant theoretical exercise but not really reflective of most people's actual situation.

aristotelian
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Re: The Magic of Savings Rate

Post by aristotelian » 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.

alfaspider
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Re: The Magic of Savings Rate

Post by alfaspider » 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.

Olemiss540
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Re: The Magic of Savings Rate

Post by Olemiss540 » Wed Sep 20, 2017 12:45 pm

avalpert wrote:
Wed Sep 20, 2017 12:30 pm
lazydavid wrote:
Wed Sep 20, 2017 10:23 am
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!).
It actually works just fine. If you're saving 95% of your income, that means you're living off of 5%. Ergo each year of savings=19 years of expenses. Do that for 2 years, and you've got 38 years' worth of retirement savings, at 0% real return.
Sure, if you assume you are starting from point zero, costs stay the same (ahem, taxes), and there are no other means of spending (be it existing resources or debt). In other words, it an elegant theoretical exercise but not really reflective of most people's actual situation.
So just ignore the mathematics behind savings rate because the chart includes outlier percentages that are not as relevant to most anyone's experience? Gotcha. Which formulas do you like to utilize that have no possibility of outlier situations that you personally deem unrealistic?

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%.

avalpert
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Re: The Magic of Savings Rate

Post by avalpert » Wed Sep 20, 2017 12:51 pm

Olemiss540 wrote:
Wed Sep 20, 2017 12:45 pm
avalpert wrote:
Wed Sep 20, 2017 12:30 pm
lazydavid wrote:
Wed Sep 20, 2017 10:23 am
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!).
It actually works just fine. If you're saving 95% of your income, that means you're living off of 5%. Ergo each year of savings=19 years of expenses. Do that for 2 years, and you've got 38 years' worth of retirement savings, at 0% real return.
Sure, if you assume you are starting from point zero, costs stay the same (ahem, taxes), and there are no other means of spending (be it existing resources or debt). In other words, it an elegant theoretical exercise but not really reflective of most people's actual situation.
So just ignore the mathematics behind savings rate because the chart includes outlier percentages that are not as relevant to most anyone's experience? Gotcha.
Um, no you don't 'got me' at all - I'm not even sure you made an attempt to understand what I said. You should ignore that table because it isn't particularly informative or actionable - it's a cure way to motivate someone to save more, but doesn't provide them really useful information to make a decision off of.
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 guess if one wants to confuse reality with pessimism then it may appear that way.
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%.
And good for you, some people need quaint marketing to be motivated to save - I prefer dealing with the real impact of that increased saving (and the cost of whatever is being given up to accomplish it).

CoAndy
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Re: The Magic of Savings Rate

Post by CoAndy » Wed Sep 20, 2017 12:52 pm

I have been perusing the earlyretirementextreme.com forum lately an have read about many people that reduce their expenses dramatically (by ditching their car, getting a roommate, living in a van or storage unit) and then increasing their savings rate to 50-70%. As most don't have families and almost all live on $1,500 a month or so (if not less), many are able to retire after only 3-4 years of saving at this rate (most did not start at $0 either, however).

aristotelian
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Re: The Magic of Savings Rate

Post by aristotelian » Wed Sep 20, 2017 1:01 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.
Sure, it is just a blog post that some guy wrote. I don't think it is meant to be a detailed retirement plan, any more than the "4% rule" or "save 15% of your income rule" etc. These are guidelines to help people develop good habits. The details are going to vary from case to case. The big point is that increasing your savings rate has the double effect of increasing the money you have and reducing the money you need. It certainly opened my eyes to think of it that way and helped me start thinking of possibilities for ER that I never really imagined.

Olemiss540
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Re: The Magic of Savings Rate

Post by Olemiss540 » Wed Sep 20, 2017 1:01 pm

avalpert wrote:
Wed Sep 20, 2017 12:51 pm
Olemiss540 wrote:
Wed Sep 20, 2017 12:45 pm
avalpert wrote:
Wed Sep 20, 2017 12:30 pm
lazydavid wrote:
Wed Sep 20, 2017 10:23 am
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!).
It actually works just fine. If you're saving 95% of your income, that means you're living off of 5%. Ergo each year of savings=19 years of expenses. Do that for 2 years, and you've got 38 years' worth of retirement savings, at 0% real return.
Sure, if you assume you are starting from point zero, costs stay the same (ahem, taxes), and there are no other means of spending (be it existing resources or debt). In other words, it an elegant theoretical exercise but not really reflective of most people's actual situation.
So just ignore the mathematics behind savings rate because the chart includes outlier percentages that are not as relevant to most anyone's experience? Gotcha.
Um, no you don't 'got me' at all - I'm not even sure you made an attempt to understand what I said. You should ignore that table because it isn't particularly informative or actionable - it's a cure way to motivate someone to save more, but doesn't provide them really useful information to make a decision off of.
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 guess if one wants to confuse reality with pessimism then it may appear that way.
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%.
And good for you, some people need quaint marketing to be motivated to save - I prefer dealing with the real impact of that increased saving (and the cost of whatever is being given up to accomplish it).
Load and clear! Now I gotcha.

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czeckers
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Re: The Magic of Savings Rate

Post by czeckers » Wed Sep 20, 2017 8:06 pm

The chart assumes you replace your entire income in retirement. Truth is that once house is paid off, kids out of house and through college, living expenses drop significantly.

If you make $250K per year and save 20%, the table says you reach FI in 37 years. But if you can be comfortable as empty nesters in a paid off home on $50K, then you reach FI in 17 years or so.
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Re: The Magic of Savings Rate

Post by Erwin007 » Wed Sep 20, 2017 9:28 pm

CoAndy wrote:
Wed Sep 20, 2017 12:52 pm
I have been perusing the earlyretirementextreme.com forum lately an have read about many people that reduce their expenses dramatically (by ditching their car, getting a roommate, living in a van or storage unit) and then increasing their savings rate to 50-70%. As most don't have families and almost all live on $1,500 a month or so (if not less), many are able to retire after only 3-4 years of saving at this rate (most did not start at $0 either, however).
Yes, perpetually living with roommates, riding a bike, and living in a van (down by the river!) or in a storage unit sounds like a great retirement...how big of a storage unit do you think I'd need for a family of 5.

Some of these things are beyond absurd.

randomguy
Posts: 4869
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Wed Sep 20, 2017 10:57 pm

alfaspider wrote:
Wed Sep 20, 2017 12:05 pm
lazydavid wrote:
Wed Sep 20, 2017 10:23 am
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!).
It actually works just fine. If you're saving 95% of your income, that means you're living off of 5%. Ergo each year of savings=19 years of expenses. Do that for 2 years, and you've got 38 years' worth of retirement savings, at 0% real return.
I would posit doing such a thing would not be sustainable in any realistic scenario.

Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.

norciom
Posts: 37
Joined: Wed Sep 28, 2016 4:46 pm

Re: The Magic of Savings Rate

Post by norciom » Wed Sep 20, 2017 11:22 pm

randomguy wrote:
Wed Sep 20, 2017 10:57 pm
Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/

xxtanisxx
Posts: 6
Joined: Wed Sep 20, 2017 12:04 pm

Re: The Magic of Savings Rate

Post by xxtanisxx » Wed Sep 20, 2017 11:45 pm

norciom wrote:
Wed Sep 20, 2017 11:22 pm
randomguy wrote:
Wed Sep 20, 2017 10:57 pm
Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/
I would say you are considered as an edge case same as mine. I lived by myself under Aunt's free master bedroom in a full-size house all by myself, earning 140K a year as contractor. Saving 40,000 into solo 401k and 5.5k IRA. I can save close to 80% driving a 1k car which I repair/maintain. Majority of major expenses are consider business expenses like new computer, 4k monitor, mouse, keyboard, gas. The only thing is food that I need to cover. Got dumped, so no more dinner date money or other activities. Although I wouldnt call myself as living poor, but edge case nevertheless.

When traveling abroad, I usually work full time and bill company accordingly. Therefore, airfare and hotel are tax deductible

It is totally not doable if you got a mortgage, rent, children, or any other expenses at least in the US.
Last edited by xxtanisxx on Wed Sep 20, 2017 11:48 pm, edited 1 time in total.

sailaway
Posts: 66
Joined: Fri May 12, 2017 1:11 pm

Re: The Magic of Savings Rate

Post by sailaway » Wed Sep 20, 2017 11:48 pm

Erwin007 wrote:
Wed Sep 20, 2017 9:28 pm
CoAndy wrote:
Wed Sep 20, 2017 12:52 pm
I have been perusing the earlyretirementextreme.com forum lately an have read about many people that reduce their expenses dramatically (by ditching their car, getting a roommate, living in a van or storage unit) and then increasing their savings rate to 50-70%. As most don't have families and almost all live on $1,500 a month or so (if not less), many are able to retire after only 3-4 years of saving at this rate (most did not start at $0 either, however).
Yes, perpetually living with roommates, riding a bike, and living in a van (down by the river!) or in a storage unit sounds like a great retirement...how big of a storage unit do you think I'd need for a family of 5.

Some of these things are beyond absurd.
Which is why they make such great reading!

norciom
Posts: 37
Joined: Wed Sep 28, 2016 4:46 pm

Re: The Magic of Savings Rate

Post by norciom » 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.

sc9182
Posts: 69
Joined: Wed Aug 17, 2016 7:43 pm

Re: The Magic of Savings Rate

Post by sc9182 » Thu Sep 21, 2017 3:59 am

randomguy wrote:
Wed Sep 20, 2017 10:57 pm

Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
Good points. One more way to look at this is: if you are "self-employed/contract" - and your spouse's meager salary employer covering healthcare (alternatively - some typr of CHIP/Welfare covering health needs).

Now - you take 20k-30k as w2 salary - turn around and put most of that in self-employed 401k -- with match.. it could be $22-23k saved-away per year. His company may have employed his wife too - saving away another $22-23k in 401k. They can run minimally on business schedule - and year-end profit. May be his business need a car to assist with customer's meetups/job-duty !? Roth IRA of $5k each ? With 2 children - save some tax monies.

As long they can keep limited income - their savings% rate could be thru the roof. But this icoukd very well be a corner case ...

teen persuasion
Posts: 358
Joined: Sun Oct 25, 2015 1:43 pm

Re: The Magic of Savings Rate

Post by teen persuasion » 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.

smitcat
Posts: 648
Joined: Mon Nov 07, 2016 10:51 am

Re: The Magic of Savings Rate

Post by smitcat » Thu Sep 21, 2017 8:02 am

xxtanisxx wrote:
Wed Sep 20, 2017 11:45 pm
norciom wrote:
Wed Sep 20, 2017 11:22 pm
randomguy wrote:
Wed Sep 20, 2017 10:57 pm
Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/
I would say you are considered as an edge case same as mine. I lived by myself under Aunt's free master bedroom in a full-size house all by myself, earning 140K a year as contractor. Saving 40,000 into solo 401k and 5.5k IRA. I can save close to 80% driving a 1k car which I repair/maintain. Majority of major expenses are consider business expenses like new computer, 4k monitor, mouse, keyboard, gas. The only thing is food that I need to cover. Got dumped, so no more dinner date money or other activities. Although I wouldnt call myself as living poor, but edge case nevertheless.

When traveling abroad, I usually work full time and bill company accordingly. Therefore, airfare and hotel are tax deductible

It is totally not doable if you got a mortgage, rent, children, or any other expenses at least in the US.
Seems impossible for most anyone - self employed pays both sides of the SS and Medicare taxes, required liability insurance, licensing and health care would need to take a good cut before any typical living expenses and paying any employees. Now I guess someone could take parts of the income in cash or take a low salary and deliver a very large company profit - but both of those approaches are frowned upon by the legal system.

randomguy
Posts: 4869
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 8:25 am

smitcat wrote:
Thu Sep 21, 2017 8:02 am
xxtanisxx wrote:
Wed Sep 20, 2017 11:45 pm
norciom wrote:
Wed Sep 20, 2017 11:22 pm
randomguy wrote:
Wed Sep 20, 2017 10:57 pm
Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/
I would say you are considered as an edge case same as mine. I lived by myself under Aunt's free master bedroom in a full-size house all by myself, earning 140K a year as contractor. Saving 40,000 into solo 401k and 5.5k IRA. I can save close to 80% driving a 1k car which I repair/maintain. Majority of major expenses are consider business expenses like new computer, 4k monitor, mouse, keyboard, gas. The only thing is food that I need to cover. Got dumped, so no more dinner date money or other activities. Although I wouldnt call myself as living poor, but edge case nevertheless.

When traveling abroad, I usually work full time and bill company accordingly. Therefore, airfare and hotel are tax deductible

It is totally not doable if you got a mortgage, rent, children, or any other expenses at least in the US.
Seems impossible for most anyone - self employed pays both sides of the SS and Medicare taxes, required liability insurance, licensing and health care would need to take a good cut before any typical living expenses and paying any employees. Now I guess someone could take parts of the income in cash or take a low salary and deliver a very large company profit - but both of those approaches are frowned upon by the legal system.

You play games by shifting things between the bussiness and your income. Compare these 2 people
a) Has 100k salary, 50k profit match
b) Has 150k salary and saves 50k

A has a 50% savings rate. B has a 33%. In reality they are both retireing at the same time. Things like income and expenses are ill defined at best.

User avatar
jadd806
Posts: 89
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Location: New England

Re: The Magic of Savings Rate

Post by jadd806 » Thu Sep 21, 2017 9:01 am

teen persuasion wrote:
Thu Sep 21, 2017 6:47 am
+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 frequent both forums, and tend to read much more than I post. As a 24 year old who started reading both forums when I was around 18, I definitely used to feel more attuned to Mr. Money Mustache and crew. But as I've gotten older I see that the Bogleheads have much more wisdom to offer which can only be gained through experience. By contrast the MMM crowd seems over-optimistic, and on average to have a poor grasp of investing. As an example, 100% equities asset allocations are very common over there and they're constantly quoting their "4% Safe Withdrawal Rate" while not seeming to understand the first thing about it. That said, I do feel more attuned to MMM "philosophically." I aim to minimize wasteful consumption and maintain a 50% savings rate. But I prefer to get my investing advice and "life advice" from the Bogleheads.

xxtanisxx
Posts: 6
Joined: Wed Sep 20, 2017 12:04 pm

Re: The Magic of Savings Rate

Post by xxtanisxx » Thu Sep 21, 2017 10:44 am

smitcat wrote:
Thu Sep 21, 2017 8:02 am
xxtanisxx wrote:
Wed Sep 20, 2017 11:45 pm
norciom wrote:
Wed Sep 20, 2017 11:22 pm
randomguy wrote:
Wed Sep 20, 2017 10:57 pm
Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/
I would say you are considered as an edge case same as mine. I lived by myself under Aunt's free master bedroom in a full-size house all by myself, earning 140K a year as contractor. Saving 40,000 into solo 401k and 5.5k IRA. I can save close to 80% driving a 1k car which I repair/maintain. Majority of major expenses are consider business expenses like new computer, 4k monitor, mouse, keyboard, gas. The only thing is food that I need to cover. Got dumped, so no more dinner date money or other activities. Although I wouldnt call myself as living poor, but edge case nevertheless.

When traveling abroad, I usually work full time and bill company accordingly. Therefore, airfare and hotel are tax deductible

It is totally not doable if you got a mortgage, rent, children, or any other expenses at least in the US.
Seems impossible for most anyone - self employed pays both sides of the SS and Medicare taxes, required liability insurance, licensing and health care would need to take a good cut before any typical living expenses and paying any employees. Now I guess someone could take parts of the income in cash or take a low salary and deliver a very large company profit - but both of those approaches are frowned upon by the legal system.
true if I had employees or need licenses. Self employed and that extra 7.5% self employed tax can be offset through business expenses. Health care is considered as business expense. As long as you take the appropriate amount of salary, s corp is legal. It is definitely doable pending free housing. Saving that close to 45k of retirement fund is the winning strategy. If I were to chose full time, 401k max out at 18k while requiring to pay 50% of income tax with zero business deductions.

You are right to question though. 80% is actually wrong when taxes are included. With tax, it is more like 50%.

smitcat
Posts: 648
Joined: Mon Nov 07, 2016 10:51 am

Re: The Magic of Savings Rate

Post by smitcat » Thu Sep 21, 2017 11:02 am

xxtanisxx wrote:
Thu Sep 21, 2017 10:44 am
smitcat wrote:
Thu Sep 21, 2017 8:02 am
xxtanisxx wrote:
Wed Sep 20, 2017 11:45 pm
norciom wrote:
Wed Sep 20, 2017 11:22 pm
randomguy wrote:
Wed Sep 20, 2017 10:57 pm
Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/
I would say you are considered as an edge case same as mine. I lived by myself under Aunt's free master bedroom in a full-size house all by myself, earning 140K a year as contractor. Saving 40,000 into solo 401k and 5.5k IRA. I can save close to 80% driving a 1k car which I repair/maintain. Majority of major expenses are consider business expenses like new computer, 4k monitor, mouse, keyboard, gas. The only thing is food that I need to cover. Got dumped, so no more dinner date money or other activities. Although I wouldnt call myself as living poor, but edge case nevertheless.

When traveling abroad, I usually work full time and bill company accordingly. Therefore, airfare and hotel are tax deductible

It is totally not doable if you got a mortgage, rent, children, or any other expenses at least in the US.
Seems impossible for most anyone - self employed pays both sides of the SS and Medicare taxes, required liability insurance, licensing and health care would need to take a good cut before any typical living expenses and paying any employees. Now I guess someone could take parts of the income in cash or take a low salary and deliver a very large company profit - but both of those approaches are frowned upon by the legal system.
true if I had employees or need licenses. Self employed and that extra 7.5% self employed tax can be offset through business expenses. Health care is considered as business expense. As long as you take the appropriate amount of salary, s corp is legal. It is definitely doable pending free housing. Saving that close to 45k of retirement fund is the winning strategy. If I were to chose full time, 401k max out at 18k while requiring to pay 50% of income tax with zero business deductions.

You are right to question though. 80% is actually wrong when taxes are included. With tax, it is more like 50%.

Yes agreed - if you ignore the fact that you made the money and then 'wrote it off' for taxes, health care etc and then said the remainder was 'income' I could save a huge %.
Also agreed on taking 'the appropriate amount of salary' which may not be as low as some would like.
And I have a few friends who have been bartenders, craftsman ,and self employed that always had a much lower reported income and for some had stated profits and others it disappeared.
Now that we are much older they are looking at their SS statements and realize that the result for one is less than $1,000/month vs more than 2X that due to the pattern they were in. Of course if he saved the difference be could be in better shape - but alas they almost never do that.

LiterallyIronic
Posts: 285
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Re: The Magic of Savings Rate

Post by LiterallyIronic » Thu Sep 21, 2017 11:13 am

CoAndy wrote:
Wed Sep 20, 2017 12:52 pm
I have been perusing the earlyretirementextreme.com forum lately an have read about many people that reduce their expenses dramatically (by ditching their car, getting a roommate, living in a van or storage unit) and then increasing their savings rate to 50-70%. As most don't have families and almost all live on $1,500 a month or so (if not less), many are able to retire after only 3-4 years of saving at this rate (most did not start at $0 either, however).
I do have a family and still get by living on "$1,500 a month or so." That doesn't make my savings rate anywhere near 50-70% of gross. People love to tout ratios, but saving 10% of a low income is far more difficult than saving 10% of a high income - let alone saving 50%. A loaf of bread costs the same for each person, but makes up a different percentage of their income.

User avatar
DaftInvestor
Posts: 3101
Joined: Wed Feb 19, 2014 10:11 am

Re: The Magic of Savings Rate

Post by DaftInvestor » Thu Sep 21, 2017 11:21 am

CoAndy wrote:
Wed Sep 20, 2017 12:52 pm
I have been perusing the earlyretirementextreme.com forum lately an have read about many people that reduce their expenses dramatically (by ditching their car, getting a roommate, living in a van or storage unit) and then increasing their savings rate to 50-70%. As most don't have families and almost all live on $1,500 a month or so (if not less), many are able to retire after only 3-4 years of saving at this rate (most did not start at $0 either, however).
The "most did not start at $0" reminds me of an old Steve Martin joke about how to become a millionaire.
The joke starts with "First, get a million dollars...."

Many of us of course start off far in the negative - with large student loans. Some then start families right away making it hard to ever get out of debt let alone think about boosting their savings rate.
Some people inherit money and suddenly have savings - most are not that fortunate.

I don't read the forum you refer to - but on the internet - of course you always have to wonder how true some stories really are.
Personally - I don't see the point of sacrificing living a normal life (aka "living in a van") just so I can obtain some type of FI for doing so.

smitcat
Posts: 648
Joined: Mon Nov 07, 2016 10:51 am

Re: The Magic of Savings Rate

Post by smitcat » Thu Sep 21, 2017 11:29 am

randomguy wrote:
Thu Sep 21, 2017 8:25 am
smitcat wrote:
Thu Sep 21, 2017 8:02 am
xxtanisxx wrote:
Wed Sep 20, 2017 11:45 pm
norciom wrote:
Wed Sep 20, 2017 11:22 pm
randomguy wrote:
Wed Sep 20, 2017 10:57 pm
Savings rates much above 60% are just about impossible. At low levels the basic costs of living sets an upper limit. At high income, you tend to get done in by taxes. its tough to make say 1 million dollars and not pay 350k+ in taxes. To get much higher you tend to need savings that don't' count as income. For example if you are making 100k and your employer gives you a 25k 401(k) match or to have expenses that don't count as income. There are always odd situations out there and someone will reply to this post mention theirs. For example if you are deployed in the military to say Iraqi you can have an insane saving rate as most of your expenses are covered and you don't have to pay taxes. You need to decide how closely it matches yours.
My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/
I would say you are considered as an edge case same as mine. I lived by myself under Aunt's free master bedroom in a full-size house all by myself, earning 140K a year as contractor. Saving 40,000 into solo 401k and 5.5k IRA. I can save close to 80% driving a 1k car which I repair/maintain. Majority of major expenses are consider business expenses like new computer, 4k monitor, mouse, keyboard, gas. The only thing is food that I need to cover. Got dumped, so no more dinner date money or other activities. Although I wouldnt call myself as living poor, but edge case nevertheless.

When traveling abroad, I usually work full time and bill company accordingly. Therefore, airfare and hotel are tax deductible

It is totally not doable if you got a mortgage, rent, children, or any other expenses at least in the US.
Seems impossible for most anyone - self employed pays both sides of the SS and Medicare taxes, required liability insurance, licensing and health care would need to take a good cut before any typical living expenses and paying any employees. Now I guess someone could take parts of the income in cash or take a low salary and deliver a very large company profit - but both of those approaches are frowned upon by the legal system.

You play games by shifting things between the bussiness and your income. Compare these 2 people
a) Has 100k salary, 50k profit match
b) Has 150k salary and saves 50k

A has a 50% savings rate. B has a 33%. In reality they are both retireing at the same time. Things like income and expenses are ill defined at best.

OK - no problems. When I figure our stuff using these new 'rules' my wife and I save $122%.... (lol)
We are self employed.

randomguy
Posts: 4869
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » Thu Sep 21, 2017 11:53 am

smitcat wrote:
Thu Sep 21, 2017 11:29 am
randomguy wrote:
Thu Sep 21, 2017 8:25 am
smitcat wrote:
Thu Sep 21, 2017 8:02 am
xxtanisxx wrote:
Wed Sep 20, 2017 11:45 pm
norciom wrote:
Wed Sep 20, 2017 11:22 pm


My saving rate is around 75%. Grow up poor, got a good job but still live like a poor person. Not fun, but hardly impossible.
Here is info about taxes in The Netherlands. http://www.expatsamsterdam.com/taxes-ne ... therlands/
I would say you are considered as an edge case same as mine. I lived by myself under Aunt's free master bedroom in a full-size house all by myself, earning 140K a year as contractor. Saving 40,000 into solo 401k and 5.5k IRA. I can save close to 80% driving a 1k car which I repair/maintain. Majority of major expenses are consider business expenses like new computer, 4k monitor, mouse, keyboard, gas. The only thing is food that I need to cover. Got dumped, so no more dinner date money or other activities. Although I wouldnt call myself as living poor, but edge case nevertheless.

When traveling abroad, I usually work full time and bill company accordingly. Therefore, airfare and hotel are tax deductible

It is totally not doable if you got a mortgage, rent, children, or any other expenses at least in the US.
Seems impossible for most anyone - self employed pays both sides of the SS and Medicare taxes, required liability insurance, licensing and health care would need to take a good cut before any typical living expenses and paying any employees. Now I guess someone could take parts of the income in cash or take a low salary and deliver a very large company profit - but both of those approaches are frowned upon by the legal system.

You play games by shifting things between the bussiness and your income. Compare these 2 people
a) Has 100k salary, 50k profit match
b) Has 150k salary and saves 50k

A has a 50% savings rate. B has a 33%. In reality they are both retireing at the same time. Things like income and expenses are ill defined at best.

OK - no problems. When I figure our stuff using these new 'rules' my wife and I save $122%.... (lol)
We are self employed.


And the question is how many days forward has your retirement moved now that your savings rate increased?:) The point is simply that people use different rule and are in different situations. Making 210k and getting another 126k in retirement contributions from the company isn't remotely the same as making 210k. You might claim the same income but you are looking at 50% more in total compensation. Obviously that is the extreme example.
It is great you saved 112k last year. Dwelling on if you income should have been 200k or 100k so that your savings rate is like 55% or 110% pretty much only matters for bragging on message boards:)

And for real fun, should you discount a dollar saves in a tax defferred account by 15-30% to account for future taxes. And no I don't think anyone in the world does that:)

DTSC
Posts: 1167
Joined: Mon Oct 20, 2008 9:47 am
Location: Illinois

Re: The Magic of Savings Rate

Post by DTSC » Thu Sep 21, 2017 1:45 pm

jadd806 wrote:
Thu Sep 21, 2017 9:01 am
teen persuasion wrote:
Thu Sep 21, 2017 6:47 am
+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 frequent both forums, and tend to read much more than I post. As a 24 year old who started reading both forums when I was around 18, I definitely used to feel more attuned to Mr. Money Mustache and crew. But as I've gotten older I see that the Bogleheads have much more wisdom to offer which can only be gained through experience. By contrast the MMM crowd seems over-optimistic, and on average to have a poor grasp of investing. As an example, 100% equities asset allocations are very common over there and they're constantly quoting their "4% Safe Withdrawal Rate" while not seeming to understand the first thing about it. That said, I do feel more attuned to MMM "philosophically." I aim to minimize wasteful consumption and maintain a 50% savings rate. But I prefer to get my investing advice and "life advice" from the Bogleheads.

I read both blocks too. Moustachians are younger and obviously have not been around nearly as long. I wonder how many of them have been through a bad bear market, such as 2008-09. It is a lot easier to brag about your portfolio and withdrawal rate if you've never seen it drop 40%...

MrNewEngland
Posts: 667
Joined: Sun Sep 28, 2014 11:38 am

Re: The Magic of Savings Rate

Post by MrNewEngland » 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.

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DaftInvestor
Posts: 3101
Joined: Wed Feb 19, 2014 10:11 am

Re: The Magic of Savings Rate

Post by DaftInvestor » Thu Sep 21, 2017 2:59 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.
Note he didn't say 100% of salary - he said 100% of your annual expense (and if the two are equal you will never be FI :))

randomguy
Posts: 4869
Joined: Wed Sep 17, 2014 9:00 am

Re: The Magic of Savings Rate

Post by randomguy » 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.

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FiveK
Posts: 3125
Joined: Sun Mar 16, 2014 2:43 pm

Re: The Magic of Savings Rate

Post by FiveK » 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.

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