Savings rate

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Topic Author
Bully3000
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Joined: Mon Jan 07, 2019 4:23 pm

Savings rate

Post by Bully3000 » Tue Apr 23, 2019 12:17 pm

How do people calculate savings rate and what is it comprised of for FI purposes, People say 10-15% for standard retirement or 20-25% for early retirement and some people seem to save above this rate also, what is the savings rate comprised of?

Is it Gross/Net income which is used to calculate the %?

Would an Employee 401k match be included as part of the 'savings' rate or a HSA contribution or extra towards paying down mortgage? or is it strictly money ear marked for retirement such as 401k, IRA and any other investment accounts which are solely for the point of retirement?

Just trying to work out if I save enough.

H-Town
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Re: Savings rate

Post by H-Town » Tue Apr 23, 2019 12:24 pm

Bully3000 wrote:
Tue Apr 23, 2019 12:17 pm
How do people calculate savings rate and what is it comprised of for FI purposes, People say 10-15% for standard retirement or 20-25% for early retirement and some people seem to save above this rate also, what is the savings rate comprised of?

Is it Gross/Net income which is used to calculate the %?

Would an Employee 401k match be included as part of the 'savings' rate or a HSA contribution or extra towards paying down mortgage? or is it strictly money ear marked for retirement such as 401k, IRA and any other investment accounts which are solely for the point of retirement?

Just trying to work out if I save enough.
You should search "saving rate" and you'll find a lot of discussions on this topic.

If you want to be FI, don't bother looking at saving rate. Look at the ratio of savings over annual expenses, including historical data as well as future projection of your savings over annual expense. You want to increase this ratio the best you can. The bigger the ratio, the faster you get to FI.

sailaway
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Re: Savings rate

Post by sailaway » Tue Apr 23, 2019 12:28 pm

I calculate my savings rate as a function of spending, rather than income. I do count the employer match as savings, and anything that goes into an investment account (ie replenishing our cash reserves is not saving). By that logic, I probably would not count mortgage principal if I had a mortgage, but it is a moot point for me at present. I do not count payroll or income taxes as spending, as they are a function of income, rather than lifestyle choices. They will also be very different in retirement.

Gufomel
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Re: Savings rate

Post by Gufomel » Tue Apr 23, 2019 12:29 pm

Personally, it is my % of gross income that I do not have earmarked for budgeted expenses (I include a monthly budgeted amount for estimated repairs/replacement for car/house in budgeted expenses). Everything not earmarked for budgeted expenses I consider to be savings, regardless of whether it’s going into a 401k, IRA, brokerage account, savings account, etc.

I do consider mortgage principal payment to be savings.

I do not count employer match (though this is an arbitrary decision).

Part of what I’m considering savings will likely eventually be used for kid’s college or other things pre-retirement expenses, so it is not strictly retirement savings %. But I do not currently have it earmarked for anything.

Frankly, it’s arbitrary. But I use the same method every month and every year, so it’s useful to me for year over year progression.

Everyone will have a different response.

Triple digit golfer
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Re: Savings rate

Post by Triple digit golfer » Tue Apr 23, 2019 12:32 pm

My opinion is that any percentage should be based on gross income. Net income is too squishy and subjective. A 401k contribution can lower my net income. To simplify, assume no taxes and other withholdings. If I make $38k a year and contribute $19k a year to a 401k and spend the other $19k, what is my savings rate? I would say 50%, but if you use net income, it is 100%, even though you spend half of your income.

If you want to judge how you're doing, look your savings as a percentage of your expenses.

Expenses, in my opinion, are all of your normal expenses plus any pretax medical premiums. I would not include taxes because those are not optional and can theoretically be managed in retirement. Poster KlangFool gets credit for this.

Assume you gross $100k, have $10k in pretax medical premiums withheld, have $15k in income/payroll taxes withheld, and contribute $19k to 401k, $6k to Roth IRA, $5k to taxable and spend the rest:

Your savings rate is 30%.
Your savings are $30k.
Your expenses are $55k.
You save 55% of one year's expenses each year.

stan1
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Re: Savings rate

Post by stan1 » Tue Apr 23, 2019 12:33 pm

Shooting for 25x or 30x of annual expenses (less income) needed in retirement has worked for me. That way if you expect to have your mortgage paid off by the time you retire you don't need to include it as an expense and you can drop expenses like social security, medicare, 401K contributions, and federal/state taxes at higher marginal rates which are big now but won't be needed in retirement. You do have to make an inflation assumption (I use 3%). At one point I had a highly personalized spreadsheet model I built that mapped all this out. After a few years I had convinced myself I was on track and didn't need to maintain the spreadsheet any longer. If my situation were to change such as the prospect of a long term job layoff or disability I'd go back to the spreadsheet.

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fortfun
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Re: Savings rate

Post by fortfun » Tue Apr 23, 2019 12:53 pm

Whatever gets you to your goal of 25x yearly spending (or whatever your number is). DW and I are saving 60% right now for early retirement of 50&51. However, I'll also have a pension. We need about 70yr for our family of 4. We save the rest and use CC bonuses for travel. Save as much as you can but enjoy yourself too. Personally, we don't buy much stuff.

LiterallyIronic
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Re: Savings rate

Post by LiterallyIronic » Tue Apr 23, 2019 1:04 pm

I count the number of dollars sent to retirement accounts, divided by gross income. I do not count mortgage principal. I do not count mortgage pre-payment. I do not count employer match, even though it vests immediately. I do not count the money that's leftover after expenses. If it's not money that I put into my 401k or IRA, it doesn't count.

runner3081
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Re: Savings rate

Post by runner3081 » Tue Apr 23, 2019 2:07 pm

Savings rate for me is calculated this way:

Savings Per Month / Gross Income Per Month

FederalFIRE
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Re: Savings rate

Post by FederalFIRE » Tue Apr 23, 2019 3:42 pm

runner3081 wrote:
Tue Apr 23, 2019 2:07 pm
Savings rate for me is calculated this way:

Savings Per Month / Gross Income Per Month
This is how I do it as well, though I count employer match as part of "savings".

I only count the planned savings when calculating the rate, so if I end up with extra funds in our working account that I end up putting into the taxable brokerage account I don't consider that as part of my savings rate since it's unplanned. I see our mortgage as an expense, so that doesn't count in savings rate to me.

Our savings rate (planned savings/gross income) is currently about 41%. If I count the other random times I add a few grand here and there that has built up then it's probably closer to 45%.

runner3081
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Re: Savings rate

Post by runner3081 » Tue Apr 23, 2019 3:57 pm

FederalFIRE wrote:
Tue Apr 23, 2019 3:42 pm
runner3081 wrote:
Tue Apr 23, 2019 2:07 pm
Savings rate for me is calculated this way:

Savings Per Month / Gross Income Per Month
This is how I do it as well, though I count employer match as part of "savings".

I only count the planned savings when calculating the rate, so if I end up with extra funds in our working account that I end up putting into the taxable brokerage account I don't consider that as part of my savings rate since it's unplanned. I see our mortgage as an expense, so that doesn't count in savings rate to me.

Our savings rate (planned savings/gross income) is currently about 41%. If I count the other random times I add a few grand here and there that has built up then it's probably closer to 45%.
I also count the employer match as part of savings (many people don't but at the end of the day, it is going into the retirement account). No mortgage anymore, but it was only counted as an expense before.

We only count planned savings as well (403B + 403B Match + HSA + ROTH + 457B + TAXABLE ACCT)

When you break it down, there is an excess of $500 per month that is just added to savings. This just pads the combined emergency/home updates/car fund.

We have an extreme savings rate at the moment.

bck63
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Re: Savings rate

Post by bck63 » Tue Apr 23, 2019 4:03 pm

runner3081 wrote:
Tue Apr 23, 2019 2:07 pm
Savings rate for me is calculated this way:

Savings Per Month / Gross Income Per Month
+1. This is the base formula I use. Using this I save 25% of gross pay, minimum, for longterm savings. With overtime (which varies significantly) -- and also including a separate spending account that I use for fun stuff (but which has more inflow than outflow) -- it is probably closer to 30%. Don't know if that's enough, but that's all I can squeeze out and still have a life with DW.
Last edited by bck63 on Wed Apr 24, 2019 2:18 pm, edited 1 time in total.

cherijoh
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Re: Savings rate

Post by cherijoh » Tue Apr 23, 2019 4:37 pm

Bully3000 wrote:
Tue Apr 23, 2019 12:17 pm
How do people calculate savings rate and what is it comprised of for FI purposes, People say 10-15% for standard retirement or 20-25% for early retirement and some people seem to save above this rate also, what is the savings rate comprised of?

Is it Gross/Net income which is used to calculate the %?

Would an Employee 401k match be included as part of the 'savings' rate or a HSA contribution or extra towards paying down mortgage? or is it strictly money ear marked for retirement such as 401k, IRA and any other investment accounts which are solely for the point of retirement?

Just trying to work out if I save enough.
I believe that with respect to the "save x% to be able to retire by 65, 60, 55, etc." it is gross salary. If it were NET, then people with lower incomes would have to save relatively more of their gross salary that a higher income person with a higher tax burden. This would make no sense since lower income investors actually need to self-fund a smaller part of their retirement since SS will replace more of their spending needs than for someone earning more. (This is because of how SS benefits are calculated.)

But as far as bragging rights go, anything goes. Probably the most common alternate method is to include the company match. Assuming you are vested in the match, I can see the logic in that although company matches are subject to change - usually downward when the economy tanks. :( So I prefer to count that as the cherry on top and stick with my own contribution to hit the target %.

And IMO people come up with non-standard formulas to justify their preferred behavior. For example, the "get out of debt fast" crowd usually include mortgage principal payments even though paying down principal at the expense of contributing to your workplace retirement plan could actually result in making you work longer to reach FI. This is especially true when a risk-averse person makes the decision to pay down the principal after the stock market has had a steep decline and their 401k has "lost money". Low valuations are in fact the best time to be buying stocks on a regular basis when you don't need the money for decades (i.e., a workplace retirement plan).

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9-5 Suited
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Re: Savings rate

Post by 9-5 Suited » Tue Apr 23, 2019 4:53 pm

To cut through a bunch of debates on the 'what is savings' question, I use a simple framework:

A dollar is put toward savings if your net worth remains the same after the transaction. Example: If I earn $1 and use it to pay down my mortgage principal by $1, my checking account (asset) is -$1 and my loan balance (liability) is -$1. The net effect on my net worth is $0, so this is SAVINGS. The same is true for money put into investment accounts.

A dollar is put toward spending if your net worth declines after the transaction. Example: If I earn $1 and use it to pay for $1 of groceries, my net worth has declined by $1 after the transaction is complete (checking account -$1, nothing to show for it on balance sheet).

So money that goes to HSA, 401K, IRA, taxable accounts, savings accounts, and loan principal repayment is all savings. Then divide by whichever number you prefer (gross vs. net, I prefer gross) and that's your savings rate. It's more of a descriptive fact and good rough target than a totally useful number though. Better to calculate an actual $ amount needed to achieve your goals.

Topic Author
Bully3000
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Re: Savings rate

Post by Bully3000 » Tue Apr 23, 2019 5:53 pm

Thanks all.

Take away is I guess i was asking two questions at once and looks like I got answers to both.

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bobcat2
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Re: Savings rate

Post by bobcat2 » Tue Apr 23, 2019 6:11 pm

Saving is income not spent, or deferred consumption. ...

Saving differs from savings. The former refers to the act of increasing one's assets, whereas the latter refers to all of one's assets. Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable. This distinction is often misunderstood, and even professional economists and investment professionals will often refer to "saving" as "savings" (for example, Investopedia confuses the two terms in its page on the "savings rate")
- Wikipedia

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

FederalFIRE
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Re: Savings rate

Post by FederalFIRE » Wed Apr 24, 2019 3:54 am

9-5 Suited wrote:
Tue Apr 23, 2019 4:53 pm
A dollar is put toward savings if your net worth remains the same after the transaction. Example: If I earn $1 and use it to pay down my mortgage principal by $1, my checking account (asset) is -$1 and my loan balance (liability) is -$1. The net effect on my net worth is $0, so this is SAVINGS. The same is true for money put into investment accounts.
I understand this logic, but it poses two challenges: First, it becomes a more complicated calculation when you're not doing a straight to principal payment of your mortgage since your interest payment is a net loss against net worth. Not terribly difficult, but still adds more complexity. Second, and I think more importantly, is that this assumes your house as an asset that could be used to cover retirement expenses. Recognize there is a ton of debate around this topic, but for me I prefer to think of housing as an expense.

That said, I realize it's a bit backward when I say that I do count my home as part of net worth, but that's a discussion for another thread...

JBeck
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Re: Savings rate

Post by JBeck » Wed Apr 24, 2019 5:45 am

Retirement account contributions + matching divided by gross salary + matching
Last edited by JBeck on Mon Apr 29, 2019 5:32 am, edited 1 time in total.

Jags4186
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Re: Savings rate

Post by Jags4186 » Wed Apr 24, 2019 5:52 am

Bully3000 wrote:
Tue Apr 23, 2019 12:17 pm
How do people calculate savings rate and what is it comprised of for FI purposes, People say 10-15% for standard retirement or 20-25% for early retirement and some people seem to save above this rate also, what is the savings rate comprised of?

Is it Gross/Net income which is used to calculate the %?

Would an Employee 401k match be included as part of the 'savings' rate or a HSA contribution or extra towards paying down mortgage? or is it strictly money ear marked for retirement such as 401k, IRA and any other investment accounts which are solely for the point of retirement?

Just trying to work out if I save enough.
How I do it:

Total dollars saved + employer matching / gross income + matching

I don’t include any dividends, interest, etc.

In action it looks like this:

Person A makes $100,000 year gross annual income and receives a 5% match on 401k contributions.

Person A saves $19000 into 401k + $5000 match
Person A saves $6000 in an IRA
Person A saves $4000 into their savings account

The rest of the money goes towards taxes/employer deducted benefits/living expenses.

$19k + $5k + 6k + $4k = $34k

$34k / $105k = 32.4% savings rate

basspond
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Re: Savings rate

Post by basspond » Wed Apr 24, 2019 7:27 am

My motto is KISS, Keep It Simple Save. Amount “you save”/Gross Salary. The reason to do this is motivation and it gives you a good number of your expenses you will not need in retirement.

stan1
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Re: Savings rate

Post by stan1 » Wed Apr 24, 2019 7:35 am

Bully3000 wrote:
Tue Apr 23, 2019 5:53 pm
Thanks all.

Take away is I guess i was asking two questions at once and looks like I got answers to both.
I'd say the takeaway is that everyone looks at it differently so figure out what works best for your needs. There's no single right answer but you want to be honest with yourself and use conservative accounting principals. Someone will come along at some point and say they view FICA as savings because SS becomes cash flow in retirement. Benchmarking on something like savings rate is difficult to do. People have different goals and circumstances.

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CyclingDuo
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Re: Savings rate

Post by CyclingDuo » Wed Apr 24, 2019 8:17 am

Bully3000 wrote:
Tue Apr 23, 2019 12:17 pm
How do people calculate savings rate and what is it comprised of for FI purposes, People say 10-15% for standard retirement or 20-25% for early retirement and some people seem to save above this rate also, what is the savings rate comprised of?

Is it Gross/Net income which is used to calculate the %?

Would an Employee 401k match be included as part of the 'savings' rate or a HSA contribution or extra towards paying down mortgage? or is it strictly money ear marked for retirement such as 401k, IRA and any other investment accounts which are solely for the point of retirement?

Just trying to work out if I save enough.
https://www.cnbc.com/2018/12/10/wealth- ... -rich.html
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baseball2horse
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Re: Savings rate

Post by baseball2horse » Wed Apr 24, 2019 9:04 am

I am curious if when people include matching in their savings rate if they also include it in their gross pay?

smitcat
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Re: Savings rate

Post by smitcat » Wed Apr 24, 2019 9:09 am

baseball2horse wrote:
Wed Apr 24, 2019 9:04 am
I am curious if when people include matching in their savings rate if they also include it in their gross pay?
I propose to you that it is irrelevant.
IMO per cent saved vs expected expenses in retirement is the best metric to watch.
All the rest are indirectly attempting to approximate that ratio in the long run anyway.

Ron Ronnerson
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Re: Savings rate

Post by Ron Ronnerson » Wed Apr 24, 2019 10:27 am

To calculate the savings rate, I divided the total of things that increase net worth (including mortgage principal) by gross income. Someone with a lot of home equity has options even if they don’t have savings in other accounts. I find gross income to be more unclear. I include gross pay from work and interest. However, gifts and credit card bonuses provide us with untaxed money that we use to pay for things. Is that income? Should it be included in the denominator to calculate the savings rate? I’m not sure so I ignore it.

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9-5 Suited
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Re: Savings rate

Post by 9-5 Suited » Wed Apr 24, 2019 1:02 pm

FederalFIRE wrote:
Wed Apr 24, 2019 3:54 am
I understand this logic, but it poses two challenges: First, it becomes a more complicated calculation when you're not doing a straight to principal payment of your mortgage since your interest payment is a net loss against net worth. Not terribly difficult, but still adds more complexity. Second, and I think more importantly, is that this assumes your house as an asset that could be used to cover retirement expenses. Recognize there is a ton of debate around this topic, but for me I prefer to think of housing as an expense.

That said, I realize it's a bit backward when I say that I do count my home as part of net worth, but that's a discussion for another thread...
It really is interesting how this topic garners so many approaches and lines of thought! A few thoughts in response:

- It's not too hard to find out or calculate ahead of time how much of each mortgage payment goes to principal vs. interest. I count the principal portion as savings, the interest portion as expense.

- This method of calculating savings rate is independent of one's view of the home as a part of retirement savings. It is a recognition of how much of one's earned income is going toward financially productive vs. consumptive uses.

- There's often confusion between the liability (mortgage) and asset (home). Recognizing that reducing a liability is savings has nothing to do with the present or future value of the home or its role in a retirement plan. As you say, a totally separate question.

Dottie57
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Re: Savings rate

Post by Dottie57 » Wed Apr 24, 2019 3:32 pm

My savings rate during working years was all tax deferred + taxable / gross.

Now I spend from savings for retirement.

FederalFIRE
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Re: Savings rate

Post by FederalFIRE » Wed Apr 24, 2019 3:52 pm

9-5 Suited wrote:
Wed Apr 24, 2019 1:02 pm
- It's not too hard to find out or calculate ahead of time how much of each mortgage payment goes to principal vs. interest. I count the principal portion as savings, the interest portion as expense.

- This method of calculating savings rate is independent of one's view of the home as a part of retirement savings. It is a recognition of how much of one's earned income is going toward financially productive vs. consumptive uses.

- There's often confusion between the liability (mortgage) and asset (home). Recognizing that reducing a liability is savings has nothing to do with the present or future value of the home or its role in a retirement plan. As you say, a totally separate question.
Agreed on the first point... I guess I'm just lazy :D

As for the second, I definitely understand the financially productive vs. consumptive use, but would argue that financially productive doesn't necessarily mean saving. This is where I think the line starts to blur with housing, and why I find it easier to draw the line before that.

As for the final point, as someone living in and paying a mortgage on a 100+ year old home I often wonder how much reducing my bank note is really reducing my financial liability. Ever year in the house is one year closer to another roof repair, furnace repair, etc. Because of the complex interplay of the value of the asset and the financial liability associated with owning it, I am reticent to including it here. Then again, one could easily argue the liability of home-ownership is no different than the risk of owning equities, and as someone who has a 100% equity portfolio maybe I should just shut up and count my mortgage principal as savings :P

finfire
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Re: Savings rate

Post by finfire » Wed Apr 24, 2019 3:55 pm

Are we supposed to calculate it? To what end?

Topic Author
Bully3000
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Re: Savings rate

Post by Bully3000 » Fri Apr 26, 2019 9:13 am

dbapaddy wrote:
Wed Apr 24, 2019 3:55 pm
Are we supposed to calculate it? To what end?
I just read 15% is a good figure to work off for retirement or 20-25% for early retirement or a late saver(me due to starting again after divorce)

I calculated I am a little shy of 20% Gross if I don't include include HSA or Mortgage pay down and about 30% if I include those plus other savings, so just wanted to know other peoples calculations to see how far off I am and what/if any adjustments I should make, I do not want to work forever and I do not want to be poor in retirement either.

I do prefer the Calculate expenses and x 25 to get a good idea of how I am doing, this gives me a number to work towards.

acegolfer
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Re: Savings rate

Post by acegolfer » Fri Apr 26, 2019 9:23 am

dbapaddy wrote:
Wed Apr 24, 2019 3:55 pm
Are we supposed to calculate it? To what end?
No.

Personally, I calculate the saving rate so that I can compare period to period. However, I don't compare mine against others because of different saving rate definitions.

smitcat
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Re: Savings rate

Post by smitcat » Fri Apr 26, 2019 9:30 am

acegolfer wrote:
Fri Apr 26, 2019 9:23 am
dbapaddy wrote:
Wed Apr 24, 2019 3:55 pm
Are we supposed to calculate it? To what end?
No.

Personally, I calculate the saving rate so that I can compare period to period. However, I don't compare mine against others because of different saving rate definitions.
Savings rate allows one to know when they will be at specific multiples of their expected expenses. That multiple will tell you when you will be financially independent and/or ready to retire.

Jags4186
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Re: Savings rate

Post by Jags4186 » Fri Apr 26, 2019 9:47 am

smitcat wrote:
Wed Apr 24, 2019 9:09 am
baseball2horse wrote:
Wed Apr 24, 2019 9:04 am
I am curious if when people include matching in their savings rate if they also include it in their gross pay?
I propose to you that it is irrelevant.
IMO per cent saved vs expected expenses in retirement is the best metric to watch.
All the rest are indirectly attempting to approximate that ratio in the long run anyway.
I agree with the conclusion but most folks have no idea what their expected retirement expenses are. I am 33 years old—I have no idea what my expenses will be in 5 years let alone 30 years. Therefore it is important to make sure you are saving a sizable percentage of your income. I always say control the things you can control. You can’t control returns. You can’t control expenses far in the future. But you can control how much you put into your bank accounts vs going towards car leases or expensive dinners out.

acegolfer
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Re: Savings rate

Post by acegolfer » Fri Apr 26, 2019 9:53 am

smitcat wrote:
Fri Apr 26, 2019 9:30 am

Savings rate allows one to know when they will be at specific multiples of their expected expenses. That multiple will tell you when you will be financially independent and/or ready to retire.
Interesting. Any link to this information?

Admiral
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Re: Savings rate

Post by Admiral » Fri Apr 26, 2019 10:02 am

I think for most people 15% of gross means you will be able to retire comfortably. Vast generalization, I realize that. (It also assumes many years of saving 15%, not "lately.")

My problem with looking at the calculation in relation to current expense is that expenses are lumpy and today's may have little or no relevance to expenses in 20 years.

For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate.

If you can save 15% (low end) to 20/25% (high end) you will likely be fine. This board is filled with super savers (me included) but I don't think you should let that skew your opinion.

I do agree that the sooner you want to stop work, the more you need so save, that's just math.

Admiral
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Re: Savings rate

Post by Admiral » Fri Apr 26, 2019 10:05 am

Jags4186 wrote:
Fri Apr 26, 2019 9:47 am
smitcat wrote:
Wed Apr 24, 2019 9:09 am
baseball2horse wrote:
Wed Apr 24, 2019 9:04 am
I am curious if when people include matching in their savings rate if they also include it in their gross pay?
I propose to you that it is irrelevant.
IMO per cent saved vs expected expenses in retirement is the best metric to watch.
All the rest are indirectly attempting to approximate that ratio in the long run anyway.
I agree with the conclusion but most folks have no idea what their expected retirement expenses are. I am 33 years old—I have no idea what my expenses will be in 5 years let alone 30 years. Therefore it is important to make sure you are saving a sizable percentage of your income. I always say control the things you can control. You can’t control returns. You can’t control expenses far in the future. But you can control how much you put into your bank accounts vs going towards car leases or expensive dinners out.
It depends on your age. Yes, most 33 YO's don't. That's less true for people in their late 40s and 50s. You get to a point where you have 15-20 years of data and you know how much it costs you to live the life you want. (Once you have kids--as opposed to thinking you might one day have them--things tend to become more clear. i.e. expensive :wink: )

smitcat
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Re: Savings rate

Post by smitcat » Fri Apr 26, 2019 10:20 am

Jags4186 wrote:
Fri Apr 26, 2019 9:47 am
smitcat wrote:
Wed Apr 24, 2019 9:09 am
baseball2horse wrote:
Wed Apr 24, 2019 9:04 am
I am curious if when people include matching in their savings rate if they also include it in their gross pay?
I propose to you that it is irrelevant.
IMO per cent saved vs expected expenses in retirement is the best metric to watch.
All the rest are indirectly attempting to approximate that ratio in the long run anyway.
I agree with the conclusion but most folks have no idea what their expected retirement expenses are. I am 33 years old—I have no idea what my expenses will be in 5 years let alone 30 years. Therefore it is important to make sure you are saving a sizable percentage of your income. I always say control the things you can control. You can’t control returns. You can’t control expenses far in the future. But you can control how much you put into your bank accounts vs going towards car leases or expensive dinners out.
interesting - I have been able to guess our expenses pretty well for a few decades now.

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Re: Savings rate

Post by smitcat » Fri Apr 26, 2019 10:22 am

acegolfer wrote:
Fri Apr 26, 2019 9:53 am
smitcat wrote:
Fri Apr 26, 2019 9:30 am

Savings rate allows one to know when they will be at specific multiples of their expected expenses. That multiple will tell you when you will be financially independent and/or ready to retire.
Interesting. Any link to this information?
My savings rate give me dollars saved each year.
I can estimate our expenses with decent accuracy.
The amount of savings above expenses will be a multiple.

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Re: Savings rate

Post by smitcat » Fri Apr 26, 2019 10:24 am

Admiral wrote:
Fri Apr 26, 2019 10:02 am
I think for most people 15% of gross means you will be able to retire comfortably. Vast generalization, I realize that. (It also assumes many years of saving 15%, not "lately.")

My problem with looking at the calculation in relation to current expense is that expenses are lumpy and today's may have little or no relevance to expenses in 20 years.

For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate.

If you can save 15% (low end) to 20/25% (high end) you will likely be fine. This board is filled with super savers (me included) but I don't think you should let that skew your opinion.

I do agree that the sooner you want to stop work, the more you need so save, that's just math.
"For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate."

It actually looks like you can pretty well estimate your expenses in the future.

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Re: Savings rate

Post by willthrill81 » Fri Apr 26, 2019 10:31 am

For us, it's simple.

Savings rate = Total savings / Gross income

We include principal repayment of our mortgage as part of our total savings.
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Re: Savings rate

Post by Admiral » Fri Apr 26, 2019 10:32 am

smitcat wrote:
Fri Apr 26, 2019 10:24 am
Admiral wrote:
Fri Apr 26, 2019 10:02 am
I think for most people 15% of gross means you will be able to retire comfortably. Vast generalization, I realize that. (It also assumes many years of saving 15%, not "lately.")

My problem with looking at the calculation in relation to current expense is that expenses are lumpy and today's may have little or no relevance to expenses in 20 years.

For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate.

If you can save 15% (low end) to 20/25% (high end) you will likely be fine. This board is filled with super savers (me included) but I don't think you should let that skew your opinion.

I do agree that the sooner you want to stop work, the more you need so save, that's just math.
"For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate."

It actually looks like you can pretty well estimate your expenses in the future.
Yes, I can. But I am nearly 50. That does not mean that any ratio of current savings to current spending is helpful for me. It isn't. If my spending is 2x now and 1x later, then you can see why it would be deceiving.

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Re: Savings rate

Post by smitcat » Fri Apr 26, 2019 10:34 am

Admiral wrote:
Fri Apr 26, 2019 10:32 am
smitcat wrote:
Fri Apr 26, 2019 10:24 am
Admiral wrote:
Fri Apr 26, 2019 10:02 am
I think for most people 15% of gross means you will be able to retire comfortably. Vast generalization, I realize that. (It also assumes many years of saving 15%, not "lately.")

My problem with looking at the calculation in relation to current expense is that expenses are lumpy and today's may have little or no relevance to expenses in 20 years.

For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate.

If you can save 15% (low end) to 20/25% (high end) you will likely be fine. This board is filled with super savers (me included) but I don't think you should let that skew your opinion.

I do agree that the sooner you want to stop work, the more you need so save, that's just math.
"For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate."

It actually looks like you can pretty well estimate your expenses in the future.
Yes, I can. But I am nearly 50. That does not mean that any ratio of current savings to current spending is helpful for me. It isn't. If my spending is 2x now and 1x later, then you can see why it would be deceiving.
Current savings to future expenses has a bunch of value.

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Re: Savings rate

Post by Jags4186 » Fri Apr 26, 2019 10:35 am

smitcat wrote:
Fri Apr 26, 2019 10:20 am
Jags4186 wrote:
Fri Apr 26, 2019 9:47 am
smitcat wrote:
Wed Apr 24, 2019 9:09 am
baseball2horse wrote:
Wed Apr 24, 2019 9:04 am
I am curious if when people include matching in their savings rate if they also include it in their gross pay?
I propose to you that it is irrelevant.
IMO per cent saved vs expected expenses in retirement is the best metric to watch.
All the rest are indirectly attempting to approximate that ratio in the long run anyway.
I agree with the conclusion but most folks have no idea what their expected retirement expenses are. I am 33 years old—I have no idea what my expenses will be in 5 years let alone 30 years. Therefore it is important to make sure you are saving a sizable percentage of your income. I always say control the things you can control. You can’t control returns. You can’t control expenses far in the future. But you can control how much you put into your bank accounts vs going towards car leases or expensive dinners out.
interesting - I have been able to guess our expenses pretty well for a few decades now.
Here are a few comparisons:

A 45 year old in 1965 might have said they would have a good idea of what there expenses would be in 1984 at age 65. In 1984 you needed $33,000 to have the same buying power as $10,000 in 1965. US equities returned 7.75% nominal through this time period but only 1.39% real.

The 20 years prior, in this individuals 20s-40s, he only experienced inflation requiring him to have $17,200 in 1964 to have the buying power of $10,000 in 1945.

Move that 45 year old to the year 1999 and he would only need $15,100 in 2018 to have the same buying power as $10,000 in 1999. US equities returned 5.59% during this time period but 3.36% real.

The 20 years prior, this individuals 20s-40s, they only need $22,500 to have the same buying power.

People retiring today have had an easy time figuring out there expenses, inflation has been low and dropping for near 40 years.

Not only that, you have no idea what issues may arise in your future. A spouse could become injured requiring in home aid. A special needs child could be born. You could plan to have one child and have triplets. Yes, I have a general idea of what I am going to be spending, but there are many unknowns, especially when “D-day” is decades away.

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Re: Savings rate

Post by Admiral » Fri Apr 26, 2019 10:40 am

smitcat wrote:
Fri Apr 26, 2019 10:34 am
Admiral wrote:
Fri Apr 26, 2019 10:32 am
smitcat wrote:
Fri Apr 26, 2019 10:24 am
Admiral wrote:
Fri Apr 26, 2019 10:02 am
I think for most people 15% of gross means you will be able to retire comfortably. Vast generalization, I realize that. (It also assumes many years of saving 15%, not "lately.")

My problem with looking at the calculation in relation to current expense is that expenses are lumpy and today's may have little or no relevance to expenses in 20 years.

For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate.

If you can save 15% (low end) to 20/25% (high end) you will likely be fine. This board is filled with super savers (me included) but I don't think you should let that skew your opinion.

I do agree that the sooner you want to stop work, the more you need so save, that's just math.
"For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate."

It actually looks like you can pretty well estimate your expenses in the future.
Yes, I can. But I am nearly 50. That does not mean that any ratio of current savings to current spending is helpful for me. It isn't. If my spending is 2x now and 1x later, then you can see why it would be deceiving.
Current savings to future expenses has a bunch of value.
Ug. Of course. That's not what I'm talking about. I was referring to the posts that suggest CURRENT savings to CURRENT SPENDING as a metric. Please re-read what I wrote, which is that such a metric may not be helpful.

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Re: Savings rate

Post by smitcat » Fri Apr 26, 2019 10:44 am

Admiral wrote:
Fri Apr 26, 2019 10:40 am
smitcat wrote:
Fri Apr 26, 2019 10:34 am
Admiral wrote:
Fri Apr 26, 2019 10:32 am
smitcat wrote:
Fri Apr 26, 2019 10:24 am
Admiral wrote:
Fri Apr 26, 2019 10:02 am
I think for most people 15% of gross means you will be able to retire comfortably. Vast generalization, I realize that. (It also assumes many years of saving 15%, not "lately.")

My problem with looking at the calculation in relation to current expense is that expenses are lumpy and today's may have little or no relevance to expenses in 20 years.

For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate.

If you can save 15% (low end) to 20/25% (high end) you will likely be fine. This board is filled with super savers (me included) but I don't think you should let that skew your opinion.

I do agree that the sooner you want to stop work, the more you need so save, that's just math.
"For example: Today, I pay big private school bills. In ten years, I won't. Today, I have a mortgage. In retirement, I won't. My income needs will not be the same. This is not true for everyone, of course. But it shows why using the saving:spending ratio is not always accurate."

It actually looks like you can pretty well estimate your expenses in the future.
Yes, I can. But I am nearly 50. That does not mean that any ratio of current savings to current spending is helpful for me. It isn't. If my spending is 2x now and 1x later, then you can see why it would be deceiving.
Current savings to future expenses has a bunch of value.
Ug. Of course. That's not what I'm talking about. I was referring to the posts that suggest CURRENT savings to CURRENT SPENDING as a metric. Please re-read what I wrote, which is that such a metric may not be helpful.

Was not me who wrote that - this was my post above...
I propose to you that it is irrelevant.
IMO per cent saved vs expected expenses in retirement is the best metric to watch.
All the rest are indirectly attempting to approximate that ratio in the long run anyway.

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Re: Savings rate

Post by CyclingDuo » Fri Apr 26, 2019 11:33 am

Bully3000 wrote:
Fri Apr 26, 2019 9:13 am
dbapaddy wrote:
Wed Apr 24, 2019 3:55 pm
Are we supposed to calculate it? To what end?
I just read 15% is a good figure to work off for retirement or 20-25% for early retirement or a late saver(me due to starting again after divorce)

I calculated I am a little shy of 20% Gross if I don't include include HSA or Mortgage pay down and about 30% if I include those plus other savings, so just wanted to know other peoples calculations to see how far off I am and what/if any adjustments I should make, I do not want to work forever and I do not want to be poor in retirement either.

I do prefer the Calculate expenses and x 25 to get a good idea of how I am doing, this gives me a number to work towards.
Depending on your streams of income in retirement, the closer you get (first in decade(s), then later in single digit years), the picture gets clearer. In the meantime along the journey to the retirement phase, you can just use various guides centered around how much income in retirement you will want/need.

Such as this one...

Image

If you want $40K per year from the risk portfolio in retirement, then the nest egg will need to be $1M to provide that. How much to save depending on when you start can help dictate your savings rate annually to reach your goals. Again, guides such as this following one are centered around how much to stash away to hit the $1M - or any sort of multiples of it in the above chart...

Image

How much monthly income do you receive? What is your age? What is your timeline until retirement? And on and on to figure out the percentage of your income you need or want to sock away for the retirement phase of your life. Obviously, if one has a risk portfolio, plus Social Security, plus a pension, plus any other additional streams of income - you are working on the risk portfolio size and savings amount to meet your goals in combination.

If I was 25 and just starting out in my career with $0 in savings, and determined I wanted/needed $2M in retirement from my risk portfolio at age 63, then I would do my best to target $1K per month (doubling the $499 in the chart above) socked away in my 401k, or combination of 401K and IRA, or combination of 401k, IRA, as well as taxable. If I didn't have the salary to do that, then I would either adjust my goals or look for ways to enhance my income while lowering expenses to reach my goal.

If I was already age 55 and in my peak earning years, had built up a sizable nest egg already, but determined in the final decade of working that I wanted to add another $1M to my nest egg before retiring (if that was a goal), then socking away $6071 per month to achieve the additional goal would be my target. Or if I determined I needed an additional $500k, then I would sock away $3035 a month to hit that additional goal. And so on and so forth.

Pick your age, desired goal, and determine what it would take for you to reach your goal. Does it fit with your current salary and household expenses in terms of being able to do it? If not, readjust your goal based on the reality of the salary you have to work with.

All the charts, graphics and saving rates are to be taken as simple starting points for you to target the distant goal(s). We cannot assume it all works out exactly as any of these graphs or suggestions imply. Returns may be lower. Those who start with a savings rate of 15-20% in their early careers and have no way of anticipating what they will actually need in retirement, then the 15-20% rate of saving is an excellent starting point to take advantage of the power of time and compounding. Those that wait longer to start will most likely have to up their rate of savings to play catch up.

Image
Last edited by CyclingDuo on Fri Apr 26, 2019 9:12 pm, edited 1 time in total.
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Re: Savings rate

Post by willthrill81 » Fri Apr 26, 2019 11:41 am

CyclingDuo wrote:
Fri Apr 26, 2019 11:33 am
If I was already age 55 and in my peak earning years, had built up a sizable nest egg already, but determined in the final decade of working that I wanted to add another $1M to my nest egg before retiring (if that was a goal), then socking away $6071 per month to achieve the additional goal would be my target. Or if I determined I needed an additional $500k, then I would sock away $3035 a month to hit that additional goal. And so on and so forth.
Excellent post. Just to add a bit, I have advocated for a while that those who are able to should probably plan to become financially independent by age 55. Reasons for this are numerous, including potentially poor returns during that final decade when most folks most need good returns, age discrimination resulting in sudden unemployment or underemployment, need to support family (e.g. aging parents, children), etc. Planning to just barely make it to FI by the time you're 65, for instance, seems fraught with risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Savings rate

Post by Admiral » Fri Apr 26, 2019 11:47 am

willthrill81 wrote:
Fri Apr 26, 2019 11:41 am
CyclingDuo wrote:
Fri Apr 26, 2019 11:33 am
If I was already age 55 and in my peak earning years, had built up a sizable nest egg already, but determined in the final decade of working that I wanted to add another $1M to my nest egg before retiring (if that was a goal), then socking away $6071 per month to achieve the additional goal would be my target. Or if I determined I needed an additional $500k, then I would sock away $3035 a month to hit that additional goal. And so on and so forth.
Excellent post. Just to add a bit, I have advocated for a while that those who are able to should probably plan to become financially independent by age 55. Reasons for this are numerous, including potentially poor returns during that final decade when most folks most need good returns, age discrimination resulting in sudden unemployment or underemployment, need to support family (e.g. aging parents, children), etc. Planning to just barely make it to FI by the time you're 65, for instance, seems fraught with risk.
Ha. This seems wildly optimistic for 99% of people. I'd imagine many people with kids are having to pay for college when they (the parents that is, not the kids) are age 50-55. Esp for people who get married in their early 30s and have kids in their mid to late 30s, the kids might still be in high school when the parent is 55.

Not saying it's not a fine aspiration but... lofty goal.

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Re: Savings rate

Post by willthrill81 » Fri Apr 26, 2019 11:51 am

Admiral wrote:
Fri Apr 26, 2019 11:47 am
willthrill81 wrote:
Fri Apr 26, 2019 11:41 am
CyclingDuo wrote:
Fri Apr 26, 2019 11:33 am
If I was already age 55 and in my peak earning years, had built up a sizable nest egg already, but determined in the final decade of working that I wanted to add another $1M to my nest egg before retiring (if that was a goal), then socking away $6071 per month to achieve the additional goal would be my target. Or if I determined I needed an additional $500k, then I would sock away $3035 a month to hit that additional goal. And so on and so forth.
Excellent post. Just to add a bit, I have advocated for a while that those who are able to should probably plan to become financially independent by age 55. Reasons for this are numerous, including potentially poor returns during that final decade when most folks most need good returns, age discrimination resulting in sudden unemployment or underemployment, need to support family (e.g. aging parents, children), etc. Planning to just barely make it to FI by the time you're 65, for instance, seems fraught with risk.
Ha. This seems wildly optimistic for 99% of people. I'd imagine many people with kids are having to pay for college when they (the parents that is, not the kids) are age 50-55. Esp for people who get married in their early 30s and have kids in their mid to late 30s, the kids might still be in high school when the parent is 55.

Not saying it's not a fine aspiration but... lofty goal.
That's why I said "those who are able to." But it's not wildly optimistic for 99% of folks. Roughly speaking, a 30% savings rate enables you to reach FI in 28 years (assumes 4% withdrawals, 5% returns, and the same spending in retirement as before). That seems doable for many successful 27 year olds to me. And a higher savings rate obviously reduces that time even further. At a 50% savings rate, the time line decreases to about 17 years
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Re: Savings rate

Post by BanquetBeer » Fri Apr 26, 2019 12:09 pm

Cycling I dunno if I would follow that chart exactly (maybe as a guideline) because I bet it doesn't take inflation into account. I would either want $1mill in todays dollars (would need to drop interest to real terms and increase contributions anually in line with inflation)

The chart as is would have me investing the equivalent of $700/month in my 30s but only $390 (in todays dollars) during my 50s - peak earning years? but in reality I would probably want to be putting in >$1260/mo future money during my 50s

My assumption is that I will increase my savings at least by inflation each year and I use real return to compute growth. My personal goal with a high savings rate is to let my money work for me so mid career I dont have to worry about layoffs or anything like that - I can work or not on my own terms. I also like the idea of starting out cheap and always increasing lifestyle (even slightly) as opposed to having it fluctuate like living paycheck to paycheck would require with any unfortunate events.
Easy to go from a old used car to a new Corolla to a Camry to a Lexus rather than start and stay with a Lexus where as some point I may have to sell for a used Corolla if the economy sinks..

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