Savings Percentage Calculation
Savings Percentage Calculation
Hi all, I see a lot of threads that incorporate savings %s (like you should aim to save 25%, 50% of income, etc) as like a goal to have.
Are you guys doing a percentage based on gross income and gross savings? So your savings (retirement accounts + after-tax) divided by full salary + income?
Or are you guys taking out tax (or anything else)?
Are you guys doing a percentage based on gross income and gross savings? So your savings (retirement accounts + after-tax) divided by full salary + income?
Or are you guys taking out tax (or anything else)?
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Re: Savings Percentage Calculation
I do the rule of a third.
A third to the government (fed, local, propery, etc), a third to live (mortgage, food, kids stuff, etc) and a third to me ( taxable, ira, etc).
A third to the government (fed, local, propery, etc), a third to live (mortgage, food, kids stuff, etc) and a third to me ( taxable, ira, etc).
- 9-5 Suited
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Re: Savings Percentage Calculation
Savings rate is more of a helpful indicator than a truly useful plan for saving an appropriate amount of money. The simple way to think about it is below - it's definitely more nuanced than this but this is a brute force starting point.
(1) estimate your annual retirement expenses and age you'd like to retire
(2) determine your desired portfolio withdrawal rate which is typical 3-4%
(3) use inputs from #1 and #2 to calculate the portfolio size you need
(4) estimate how many dollars you need to save every year in order to have a good chance of achieving the amount in #3 using a range of possible market returns
So if you think you will spend $90,000 per year in retirement and want to withdraw 3% of the original amount per year, you would need a $3M portfolio. To achieve a $3M portfolio, you'd need to save (fill in the blank) $ per year depending on your current assets, years until retirement, and assumed rate of return.
Savings rate is only helpful after doing this, as you can convert the $ amount to a % of income for budget planning purposes if helpful.
(1) estimate your annual retirement expenses and age you'd like to retire
(2) determine your desired portfolio withdrawal rate which is typical 3-4%
(3) use inputs from #1 and #2 to calculate the portfolio size you need
(4) estimate how many dollars you need to save every year in order to have a good chance of achieving the amount in #3 using a range of possible market returns
So if you think you will spend $90,000 per year in retirement and want to withdraw 3% of the original amount per year, you would need a $3M portfolio. To achieve a $3M portfolio, you'd need to save (fill in the blank) $ per year depending on your current assets, years until retirement, and assumed rate of return.
Savings rate is only helpful after doing this, as you can convert the $ amount to a % of income for budget planning purposes if helpful.
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Re: Savings Percentage Calculation
I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target.
The calculation used:
Total Savings + 403B Match / Gross Income
Some will argue against the match being included, but that is how I calculate it.
The calculation used:
Total Savings + 403B Match / Gross Income
Some will argue against the match being included, but that is how I calculate it.
Re: Savings Percentage Calculation
I see you added the company match. I was curious if people did that.runner3081 wrote: ↑Thu Sep 05, 2019 1:00 pm I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target.
The calculation used:
Total Savings + 403B Match / Gross Income
Some will argue against the match being included, but that is how I calculate it.
I'm more curious as to what people consider "savings." Saving for what? Retirement? If more than retirement (and even if not) should saving not be anything that increases net worth/pays down debt, like principal on mortgage? I can refinance the years left on my 15 year mortgage to a new 30-year loan and drop my mortgage payment drastically. Am I really saving any more? Even more so the case if you have a home you know you will downsize from in retirement.
Sorry if I opened a can of worms, but definitions are important.
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Re: Savings Percentage Calculation
In terms of strict definitions, there's less debate than people imagine. You take all the money you make in a year and put it in a pile. Every time you spend one of those dollars, your net worth goes down by $1. Every dollar you use to maintain your net worth is savings. Putting money into savings accounts, investment accounts, or debt principal reduction is all savings as it's a net-neutral net worth event.Miguelito wrote: ↑Thu Sep 05, 2019 1:23 pmI see you added the company match. I was curious if people did that.runner3081 wrote: ↑Thu Sep 05, 2019 1:00 pm I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target.
The calculation used:
Total Savings + 403B Match / Gross Income
Some will argue against the match being included, but that is how I calculate it.
I'm more curious as to what people consider "savings." Saving for what? Retirement? If more than retirement (and even if not) should saving not be anything that increases net worth/pays down debt, like principal on mortgage? I can refinance the years left on my 15 year mortgage to a new 30-year loan and drop my mortgage payment drastically. Am I really saving any more? Even more so the case if you have a home you know you will downsize from in retirement.
Sorry if I opened a can of worms, but definitions are important.
In practical terms though, most people care about saving toward liquid dollar investment targets (like investment portfolio size). So people may opt to take the personal side of personal finance and make their own rules that work for their specific goals.
Re: Savings Percentage Calculation
You are going to get 6 or 7 difference answers to this question and frankly it makes no difference. Pick one that you like and move on.
But, to answer your question, I never calculated my percentage. My goal was to keep my expenses reasonable and then save the rest. But then again, my income has always fluctuated based on my performance.
But, to answer your question, I never calculated my percentage. My goal was to keep my expenses reasonable and then save the rest. But then again, my income has always fluctuated based on my performance.
A time to EVALUATE your jitters: |
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Re: Savings Percentage Calculation
I've always used gross income for my denominator since if you use take-home pay and include 401(k) contributions, the percentage is skewed. I consider payroll taxes to be an expense like mortgage or utilities.
So my calculation goes like this: (401K Contr. + Roth Contr. + Add. Savings) / Gross Income
So my calculation goes like this: (401K Contr. + Roth Contr. + Add. Savings) / Gross Income
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Re: Savings Percentage Calculation
Yeah, pick one and move on. It matters less how you compare to others, and more about reducing your expenses and maximizing your own savings. Once you pick one, hold to it. Then try to reduce expenses so you can increase it each year. Adding 1% with each pay raise is always good. Personally, I use a percentage of gross income, including 401k match. I am saving a minimum of 18.5% gross, plus whatever I can add during the year.
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Re: Savings Percentage Calculation
I'm going to get an earful for this, but I simply use:
Savings rate = retirement contributions / gross income.
I don't count employer match, mortgage principal, mortgage prepayment, saving for future purchases, or excess money at the end of the month (even though I do all those things), and I use gross rather than net for the denominator. This method of calculating it results in the smallest possible figure that can represent "savings rate." So it forces me to save even more because it takes even more effort to get the number up.
Savings rate = retirement contributions / gross income.
I don't count employer match, mortgage principal, mortgage prepayment, saving for future purchases, or excess money at the end of the month (even though I do all those things), and I use gross rather than net for the denominator. This method of calculating it results in the smallest possible figure that can represent "savings rate." So it forces me to save even more because it takes even more effort to get the number up.
Re: Savings Percentage Calculation
I blurted out both 50% and 25% in a recent thread. I was referring to "percent of after tax income" since I was referencing a savings rate versus future spending ability. But operating in actual dollars is much more useful. Get good with spreadsheets!
Re: Savings Percentage Calculation
Here's a robust calculation for savings rate, usable if you have a mixture of before- and after-tax savings:
S.R. = (Before tax savings)/(Gross income) + [1 - (Before tax savings)/(Gross income)]*(After-tax savings)/(After-tax Income)
Here are a few examples:
If you save nothing before tax, then this reduces to your after-tax savings rate.
If you save nothing after-tax, then this reduces to your before-tax savings rate
If you save 25% before-tax and 25% after-tax, this equals 44%. It wouldn't be accurate to say your savings rate is 50%.
If you save 50% before-tax and 99% after-tax, this equals 99.5% (note that just adding the two rates gives 149%... that can't be right)
S.R. = (Before tax savings)/(Gross income) + [1 - (Before tax savings)/(Gross income)]*(After-tax savings)/(After-tax Income)
Here are a few examples:
If you save nothing before tax, then this reduces to your after-tax savings rate.
If you save nothing after-tax, then this reduces to your before-tax savings rate
If you save 25% before-tax and 25% after-tax, this equals 44%. It wouldn't be accurate to say your savings rate is 50%.
If you save 50% before-tax and 99% after-tax, this equals 99.5% (note that just adding the two rates gives 149%... that can't be right)
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Re: Savings Percentage Calculation
I think this gives a few ways of looking at it that may help you determine what is best for you:
https://earlyretirementnow.com/2017/04/05/savings-rate/
https://earlyretirementnow.com/2017/04/05/savings-rate/
Re: Savings Percentage Calculation
I'd only argue that the 403b match should be in both the denominator and numerator, since it is part of your employment income.runner3081 wrote: ↑Thu Sep 05, 2019 1:00 pm I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target.
The calculation used:
Total Savings + 403B Match / Gross Income
Some will argue against the match being included, but that is how I calculate it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: Savings Percentage Calculation
This is the truth.9-5 Suited wrote: ↑Thu Sep 05, 2019 1:30 pm In terms of strict definitions, there's less debate than people imagine. You take all the money you make in a year and put it in a pile. Every time you spend one of those dollars, your net worth goes down by $1. Every dollar you use to maintain your net worth is savings. Putting money into savings accounts, investment accounts, or debt principal reduction is all savings as it's a net-neutral net worth event.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Savings Percentage Calculation
Savings for me = Retirement and 529. Retirement includes post-tax, pre-tax, etc (403B, 457B, ROTH, Brokerage).Miguelito wrote: ↑Thu Sep 05, 2019 1:23 pmI see you added the company match. I was curious if people did that.runner3081 wrote: ↑Thu Sep 05, 2019 1:00 pm I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target.
The calculation used:
Total Savings + 403B Match / Gross Income
Some will argue against the match being included, but that is how I calculate it.
I'm more curious as to what people consider "savings." Saving for what? Retirement? If more than retirement (and even if not) should saving not be anything that increases net worth/pays down debt, like principal on mortgage? I can refinance the years left on my 15 year mortgage to a new 30-year loan and drop my mortgage payment drastically. Am I really saving any more? Even more so the case if you have a home you know you will downsize from in retirement.
Sorry if I opened a can of worms, but definitions are important.
Excess at the end of the month goes ($300ish) to the eFund, but is not counted as savings to me.
Last edited by runner3081 on Thu Sep 05, 2019 4:11 pm, edited 2 times in total.
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Re: Savings Percentage Calculation
We calculate our savings rate as follows: total contributions to all accounts (all of which are tax-advantaged in some way) / gross income.
The Sensible Steward
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Re: Savings Percentage Calculation
I can see the point. However, in my case, the match is small at only 2% due to also having a full DC plan with my employer. Even if I changed my methodology, it is less than half a percent in the savings rate (including in gross vs not).vineviz wrote: ↑Thu Sep 05, 2019 2:29 pmI'd only argue that the 403b match should be in both the denominator and numerator, since it is part of your employment income.runner3081 wrote: ↑Thu Sep 05, 2019 1:00 pm I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target.
The calculation used:
Total Savings + 403B Match / Gross Income
Some will argue against the match being included, but that is how I calculate it.
Re: Savings Percentage Calculation
Savings vs net income for us - it takes the taxes out of the equation and makes it more valuable to compare to our retirement goals.
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Re: Savings Percentage Calculation
Interesting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
Re: Savings Percentage Calculation
This is the definition I used as well while I was working. (I'm retired now).sthadani wrote: ↑Thu Sep 05, 2019 1:36 pm I've always used gross income for my denominator since if you use take-home pay and include 401(k) contributions, the percentage is skewed. I consider payroll taxes to be an expense like mortgage or utilities.
So my calculation goes like this: (401K Contr. + Roth Contr. + Add. Savings) / Gross Income
I didn't count matching because companies can reduce or eliminate matching (or you could get a different job with inferior matching). If that were to happen and you needed that match to hit your savings target, coming up with additional money to contribute might be difficult.
While I would count mortgage principal towards net worth, I didn't count it as savings because you have to sell your house to free it up. Plus I have the sneaking suspicion that people who insist on counting it have bought too much house and are covering up their lack of other savings.
And when people say they will downsize in retirement, I think they overestimate how much home equity they will free up. One-story houses suitable for retirees cost more per square foot, plus the land is usually an appreciable share of the cost. The exception would be is if you retire to a much lower cost of living area, although not everyone follows through on doing that - especially if it means moving far away from grandkids.
Re: Savings Percentage Calculation
I like how klangfool on this forum does it.
Every year he saves 1 year of expenses.
Every year he saves 1 year of expenses.
A time to EVALUATE your jitters: |
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Re: Savings Percentage Calculation
The rate in % is not relative - the amount you save vs the amount your expenses will be are relative.runner3081 wrote: ↑Thu Sep 05, 2019 4:33 pmInteresting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
Figuring in taxes skews the comparison based upon income level , which is not a function of expenses in retirement.
"My view on taxes is that they are an expense, no different than insurance, food, etc"
For some folks taxes will go down by huge percentages, for many they will be halved or less, for others taxes might even go up.
Re: Savings Percentage Calculation
And maybe another way to view why using gross income is not a great metric.runner3081 wrote: ↑Thu Sep 05, 2019 4:33 pmInteresting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
As our income went up our taxes went up faster so savings the same amount of funds would produce a lower savings rate.
But saving a larger amount if funds would still produce a lower savings rate.
So we find % of gross to be irrelative and not a good metric.
Re: Savings Percentage Calculation
Regarding taxes, I would not not use taxes in that calculation since I know my taxes in retirement will be a tiny tiny fraction of what it is today.
A time to EVALUATE your jitters: |
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Re: Savings Percentage Calculation
Counts as expenses in terms of calculating savings percentage, not calculating how much is needed in retirement - no relevance there.smitcat wrote: ↑Thu Sep 05, 2019 4:59 pm"My view on taxes is that they are an expense, no different than insurance, food, etc"runner3081 wrote: ↑Thu Sep 05, 2019 4:33 pmInteresting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
For some folks taxes will go down by huge percentages, for many they will be halved or less, for others taxes might even go up.
Re: Savings Percentage Calculation
runner3081 wrote: ↑Thu Sep 05, 2019 5:43 pmCounts as expenses in terms of calculating savings percentage, not calculating how much is needed in retirement - no relevance there.smitcat wrote: ↑Thu Sep 05, 2019 4:59 pm"My view on taxes is that they are an expense, no different than insurance, food, etc"runner3081 wrote: ↑Thu Sep 05, 2019 4:33 pmInteresting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
For some folks taxes will go down by huge percentages, for many they will be halved or less, for others taxes might even go up.
How is that valuable or usable as a metric then? Please explain?
Re: Savings Percentage Calculation
I have no idea if there is truly a correct answer to your question, or if there is even any benefit to calculating it, but here is the formula I use:
(Savings + 401K match + employer pension contribution) / (Gross income + 401K match + employer pension contribution)
I try to save two times my cash expenses (doesn't include taxes) each year.
(Savings + 401K match + employer pension contribution) / (Gross income + 401K match + employer pension contribution)
I try to save two times my cash expenses (doesn't include taxes) each year.
Re: Savings Percentage Calculation
Wow. I m really impressed by some of the savers on this forum. And I thought saving 1 year of expenses every year was a lot by klangfool.Traveler wrote: ↑Thu Sep 05, 2019 8:13 pm I have no idea if there is truly a correct answer to your question, or if there is even any benefit to calculating it, but here is the formula I use:
(Savings + 401K match + employer pension contribution) / (Gross income + 401K match + employer pension contribution)
I try to save two times my cash expenses (doesn't include taxes) each year.
I never actually took a percentage and made that my savings goal. And I ve saved for all kinds of things in one accumlation for the last fifteen to twenty years, retirement, cars, vacations, home repairs. My pension at work, which was converted to a 401 k 15-20 years ago I never considered personal savings. Agreed the 401k did impact my income.
So my emphasis on savings has been to add to our taxable accounts. The pension/401k money has been on the side, like a job benefit. Of course with the conversion to the 401k, I am paying for that benefit.
Re: Savings Percentage Calculation
Agree. I was going to recommend this. Lays out all the logical and illogical ways of coming up with a rate. And much easier to read than another "savings rate" thread on Bogleheads.Quantumfizz wrote: ↑Thu Sep 05, 2019 2:26 pm I think this gives a few ways of looking at it that may help you determine what is best for you:
https://earlyretirementnow.com/2017/04/05/savings-rate/
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Re: Savings Percentage Calculation
I never said it was valuable, where did that come from? I was simply answering the OP's question about how to calculate it. In fact, my first post was this: "I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target."smitcat wrote: ↑Thu Sep 05, 2019 6:16 pmrunner3081 wrote: ↑Thu Sep 05, 2019 5:43 pmCounts as expenses in terms of calculating savings percentage, not calculating how much is needed in retirement - no relevance there.smitcat wrote: ↑Thu Sep 05, 2019 4:59 pm"My view on taxes is that they are an expense, no different than insurance, food, etc"runner3081 wrote: ↑Thu Sep 05, 2019 4:33 pmInteresting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
For some folks taxes will go down by huge percentages, for many they will be halved or less, for others taxes might even go up.
How is that valuable or usable as a metric then? Please explain?
Re: Savings Percentage Calculation
I think targets against actual future expenses are valuable , for many reasons.runner3081 wrote: ↑Thu Sep 05, 2019 9:13 pmI never said it was valuable, where did that come from? I was simply answering the OP's question about how to calculate it. In fact, my first post was this: "I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target."smitcat wrote: ↑Thu Sep 05, 2019 6:16 pmrunner3081 wrote: ↑Thu Sep 05, 2019 5:43 pmCounts as expenses in terms of calculating savings percentage, not calculating how much is needed in retirement - no relevance there.smitcat wrote: ↑Thu Sep 05, 2019 4:59 pm"My view on taxes is that they are an expense, no different than insurance, food, etc"runner3081 wrote: ↑Thu Sep 05, 2019 4:33 pm
Interesting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
For some folks taxes will go down by huge percentages, for many they will be halved or less, for others taxes might even go up.
How is that valuable or usable as a metric then? Please explain?
Re: Savings Percentage Calculation
My introduction to personal finance was through an NPR interview with William Bernstein. I believe he recommended saving 20% of income then, so I have since treated that as a lower bound savings target.
Re: Savings Percentage Calculation
My saving varies from year to year. But I consider any funds that contribute to my net worth as savings. For example, when my 401k contributions were severely restricted by my HCE status and I already had money in taxable accounts for an EF, I made monthly extra payments of principal to pay down my mortgage early. The rate on my mortgage was high and interest rates were dropping fast, so it made sense. I considered that savings. So all these contributions toward my net worth divided by my gross income is what I consider my savings rate. The plan on my new megacorp allows me to contribute up to 62k including the company match. Once that is maxed out for the year, I'll direct money into my taxable account. It's all savings in my mind and on my spreadsheets that I now keep. YMMV.azianbob wrote: ↑Thu Sep 05, 2019 12:16 pm Hi all, I see a lot of threads that incorporate savings %s (like you should aim to save 25%, 50% of income, etc) as like a goal to have.
Are you guys doing a percentage based on gross income and gross savings? So your savings (retirement accounts + after-tax) divided by full salary + income?
Or are you guys taking out tax (or anything else)?
Re: Savings Percentage Calculation
My saving varies from year to year. But I consider any funds that contribute to my net worth as savings. For example, when my 401k contributions were severely restricted by my HCE status and I already had money in taxable accounts for an EF, I made monthly extra payments of principal to pay down my mortgage early. The rate on my mortgage was high and interest rates were dropping fast, so it made sense. I considered that savings. So all these contributions toward my net worth divided by my gross income is what I consider my savings rate. The plan on my new megacorp allows me to contribute up to 62k including the company match. Once that is maxed out for the year, I'll direct money into my taxable account. It's all savings in my mind and on my spreadsheets that I now keep. YMMV.azianbob wrote: ↑Thu Sep 05, 2019 12:16 pm Hi all, I see a lot of threads that incorporate savings %s (like you should aim to save 25%, 50% of income, etc) as like a goal to have.
Are you guys doing a percentage based on gross income and gross savings? So your savings (retirement accounts + after-tax) divided by full salary + income?
Or are you guys taking out tax (or anything else)?
Re: Savings Percentage Calculation
Save and invest 30% of after tax income and blow the other 70%. YOLO! You Only Live Once!
Income: do not ignore your investment income. If using rental RE, this extra, non-job, income is very visible. With all-stocks ETFs the volatility masks the average income. Nevertheless it can be very substantial after a couple of decades, say, in your mid 40s.
Investing: Count your paying off of principal on your home mortgage as investing. Interest is always consumption and should not be counted as saving-and-investing.
I have actually lived through the above and retired at 55. Now at 75 my NW is in 8 figures (obviously too much of a BH. Still hate paying for Business Class travel). Start EARLY and quit worrying about details. YOLO! 70% of after-tax is ample to support a lifestyle appropriate to your earning capacity.
Income: do not ignore your investment income. If using rental RE, this extra, non-job, income is very visible. With all-stocks ETFs the volatility masks the average income. Nevertheless it can be very substantial after a couple of decades, say, in your mid 40s.
Investing: Count your paying off of principal on your home mortgage as investing. Interest is always consumption and should not be counted as saving-and-investing.
I have actually lived through the above and retired at 55. Now at 75 my NW is in 8 figures (obviously too much of a BH. Still hate paying for Business Class travel). Start EARLY and quit worrying about details. YOLO! 70% of after-tax is ample to support a lifestyle appropriate to your earning capacity.
Re: Savings Percentage Calculation
+1 - Keep it simple. The purpose of savings is to increase net worth. So anything that increases it will be savings. There is an argument whether house should be added in net worth, because it helps you avoid an expense (rent) , I would say yes.vineviz wrote: ↑Thu Sep 05, 2019 2:31 pmThis is the truth.9-5 Suited wrote: ↑Thu Sep 05, 2019 1:30 pm In terms of strict definitions, there's less debate than people imagine. You take all the money you make in a year and put it in a pile. Every time you spend one of those dollars, your net worth goes down by $1. Every dollar you use to maintain your net worth is savings. Putting money into savings accounts, investment accounts, or debt principal reduction is all savings as it's a net-neutral net worth event.
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Re: Savings Percentage Calculation
Agree, that I aim for, I do not aim for a current savings percent target.smitcat wrote: ↑Fri Sep 06, 2019 7:38 amI think targets against actual future expenses are valuable , for many reasons.runner3081 wrote: ↑Thu Sep 05, 2019 9:13 pmI never said it was valuable, where did that come from? I was simply answering the OP's question about how to calculate it. In fact, my first post was this: "I don't really care about my actual savings rate. It is very high, but I do not aim for a specific target."smitcat wrote: ↑Thu Sep 05, 2019 6:16 pmrunner3081 wrote: ↑Thu Sep 05, 2019 5:43 pmCounts as expenses in terms of calculating savings percentage, not calculating how much is needed in retirement - no relevance there.
How is that valuable or usable as a metric then? Please explain?
Re: Savings Percentage Calculation
Thank you all for the replies. I guess I just wanted to know how a savings% is calculated. I do not use it myself as a budging tool to save.
Like others, my main goal is to maintain an emergency fund with 1 year of expenses, and contribute to the max annually to my 401k, Roth IRA, and HSA, then with the after tax money I have left over, make sure my monthly expenses are less than that. The rest gets invested.
But I wanted to understand more how it is calculated since I do see it a lot on the boards, where people will say I save 50% ... wondered if that was straight gross or net or net with things like tax taken out.
Like others, my main goal is to maintain an emergency fund with 1 year of expenses, and contribute to the max annually to my 401k, Roth IRA, and HSA, then with the after tax money I have left over, make sure my monthly expenses are less than that. The rest gets invested.
But I wanted to understand more how it is calculated since I do see it a lot on the boards, where people will say I save 50% ... wondered if that was straight gross or net or net with things like tax taken out.
Re: Savings Percentage Calculation
Here is how I calculate my savings rate on a yearly basis:azianbob wrote: ↑Fri Sep 06, 2019 2:06 pm Thank you all for the replies. I guess I just wanted to know how a savings% is calculated. I do not use it myself as a budging tool to save.
Like others, my main goal is to maintain an emergency fund with 1 year of expenses, and contribute to the max annually to my 401k, Roth IRA, and HSA, then with the after tax money I have left over, make sure my monthly expenses are less than that. The rest gets invested.
But I wanted to understand more how it is calculated since I do see it a lot on the boards, where people will say I save 50% ... wondered if that was straight gross or net or net with things like tax taken out.
Salary + Bonus + 401k match + HSA match = income
Savings = money added to 401k (including match), HSAs (including match), IRAs, taxable accounts, savings accounts
Savings / Income = savings rate
So putting example numbers to it:
Salary = $100k
Bonus =. $15k
401k Match = $4k
HSA Match - $1k
Total Income = $120k
Savings:
401k: $19k
401k match: $4k
HSA: $6k
HSA Match: $1k
IRA: $6k
Taxable: $5k
Total savings = $41,000
$41,000 / $120,000 = 34% savings rate
$120,000 income
$41,000 savings
$79,000 expenses + taxes
Re: Savings Percentage Calculation
Don't put too much stocks in other people's saving rate. They mean nothing to what you do.azianbob wrote: ↑Fri Sep 06, 2019 2:06 pm Thank you all for the replies. I guess I just wanted to know how a savings% is calculated. I do not use it myself as a budging tool to save.
Like others, my main goal is to maintain an emergency fund with 1 year of expenses, and contribute to the max annually to my 401k, Roth IRA, and HSA, then with the after tax money I have left over, make sure my monthly expenses are less than that. The rest gets invested.
But I wanted to understand more how it is calculated since I do see it a lot on the boards, where people will say I save 50% ... wondered if that was straight gross or net or net with things like tax taken out.
Do your best with saving and living. Your saving rate is what it is. It's useful to see your trend of savings over the years with life events.
Time is the ultimate currency.
Re: Savings Percentage Calculation
This is how I would do it, but savings rate is not something I typically calculate or track.Jags4186 wrote: ↑Fri Sep 06, 2019 2:14 pm Here is how I calculate my savings rate on a yearly basis:
Salary + Bonus + 401k match + HSA match = income
Savings = money added to 401k (including match), HSAs (including match), IRAs, taxable accounts, savings accounts
Savings / Income = savings rate
So putting example numbers to it:
Salary = $100k
Bonus =. $15k
401k Match = $4k
HSA Match - $1k
Total Income = $120k
Savings:
401k: $19k
401k match: $4k
HSA: $6k
HSA Match: $1k
IRA: $6k
Taxable: $5k
Total savings = $41,000
$41,000 / $120,000 = 34% savings rate
$120,000 income
$41,000 savings
$79,000 expenses + taxes
Re: Savings Percentage Calculation
Percentage of gross. Everything else deducted from your paycheck is an expense.
Re: Savings Percentage Calculation
Well, if you want a detailed breakdown, I do the following monthly:
I add up these items for EXPENSES:
- Interest on Mortgage (I do not classify the principal portion of my monthly mortgage payment as an expense, since I'm adding to the equity in my house. YMMV)
- Homeowner's insurance
- Property Taxes
- VOIP Phone
- City Utilities (water/sewer)
- Natural Gas
- Internet
- Trash pickup
- Media subscriptions (e.g., Netflix, Spotify...)
- Employee Health Insurance (twice monthly from paycheck)
- Employee Dental Insurance (twice monthly from paycheck)
- Personal Accident Insurance (twice monthly from paycheck)
- Groceries
- Gasoline
- General Household maintenance
- School Expenses
- Charity/Tithing
- Medical
- Pharmacy
- Taxes and Professional Dues
- Hobbies
- Dining out
- Entertainment
- Vacation
- Federal and State Taxes on paychecks
Then I add up the following for INCOME:
- Gross Pay
- 401 Match
- Additions to Pension
- Extra Income (e.g., bonuses, selling a personal possession, cash gifts, etc...)
Then it's (INCOME - EXPENSES)/INCOME to calculate my monthly savings percentage.
I average around 25% per month.
I add up these items for EXPENSES:
- Interest on Mortgage (I do not classify the principal portion of my monthly mortgage payment as an expense, since I'm adding to the equity in my house. YMMV)
- Homeowner's insurance
- Property Taxes
- VOIP Phone
- City Utilities (water/sewer)
- Natural Gas
- Internet
- Trash pickup
- Media subscriptions (e.g., Netflix, Spotify...)
- Employee Health Insurance (twice monthly from paycheck)
- Employee Dental Insurance (twice monthly from paycheck)
- Personal Accident Insurance (twice monthly from paycheck)
- Groceries
- Gasoline
- General Household maintenance
- School Expenses
- Charity/Tithing
- Medical
- Pharmacy
- Taxes and Professional Dues
- Hobbies
- Dining out
- Entertainment
- Vacation
- Federal and State Taxes on paychecks
Then I add up the following for INCOME:
- Gross Pay
- 401 Match
- Additions to Pension
- Extra Income (e.g., bonuses, selling a personal possession, cash gifts, etc...)
Then it's (INCOME - EXPENSES)/INCOME to calculate my monthly savings percentage.
I average around 25% per month.
Re: Savings Percentage Calculation
I agree savings rate is worthless. This became really apparent to me when I moved from the Midwest to Manhattan. Totally different cost of living. I save less a percentage of my gross or net income but a much higher total dollar amount. Considering I don't plan on staying here that long and moving back to the Midwest, this will allow me to reach my end goal of portfolio size faster...hopefully.runner3081 wrote: ↑Thu Sep 05, 2019 4:33 pmInteresting, this seems to artificially inflate the rate of savings. My view on taxes is that they are an expense, no different than insurance, food, etc.
Like you said, savings rate is pretty much worthless. It depends on what you need to retire and how to meet those goals.
Just save as much as you can and still try to live your life. Trust me, a lot of people aim for a goal of say 25% but then they run the calculations and see 30% would get them to their goal x number of years faster. Then it's 33% or 30% or some other number. In the end, it's the final number that matters which is having a portfolio to live off of without having to worry about it. That number is different for everyone.
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Re: Savings Percentage Calculation
For those who say they include employer matches in the calculation, how would you suggest handling pension contributions? I’m a teacher and don’t get any matches on my 403b or 457b. However, I do contribute toward a pension and so does my employer as well as the state. If I were to quit my job tomorrow, I could take out whatever I’ve contributed so far as well as the interest on those contributions (not that I would do this). I would not be able to get the contributions made by the employer or state if I were to do this, though. I’m eligible to retire with a pension in 10 years (but plan to work for another 15-17 years) and the size of my pension is definitely affected by the contributions made by parties other than myself. I’m expecting $100k/year in 2019 dollars around age 60 (includes COLA and 100% survivor benefits).
Any thoughts on how the pension contributions should be factored into a savings rate calculation?
Any thoughts on how the pension contributions should be factored into a savings rate calculation?
Re: Savings Percentage Calculation
Ron Ronnerson wrote: ↑Sun Sep 08, 2019 11:01 am For those who say they include employer matches in the calculation, how would you suggest handling pension contributions? I’m a teacher and don’t get any matches on my 403b or 457b. However, I do contribute toward a pension and so does my employer as well as the state. If I were to quit my job tomorrow, I could take out whatever I’ve contributed so far as well as the interest on those contributions (not that I would do this). I would not be able to get the contributions made by the employer or state if I were to do this, though. I’m eligible to retire with a pension in 10 years (but plan to work for another 15-17 years) and the size of my pension is definitely affected by the contributions made by parties other than myself. I’m expecting $100k/year in 2019 dollars around age 60 (includes COLA and 100% survivor benefits).
Any thoughts on how the pension contributions should be factored into a savings rate calculation?
There are two ways you could do this. Neither is strictly right or wrong, and they roughly equate to using a cash-flow method or an accrual method. Both illustrate potential problems with relying too heavily of savings rate "rules of thumb".
The first approach would be to not count the pension contribution at all until you're vested (e.g. in 2029 or whatever) and to count all the dollars that your employer+state have contributed up to that point as being both income and savings IN THAT YEAR. This is conservative in the sense that you aren't counting the contributions at all until you actually legally own them, but it'll give you a wild swing in savings rate in that year. You could end up with a savings rate of 747% (just making up numbers here) in one year and just 15% in the year before and 20% in the year after.
The second approach would be to phase in the numbers. If it takes 20 years from the day you start to be fully vested in the pension, in the first year you count 1/20th of the employer+state contributions as part of both income and savings. Every year the fraction increases such that it is 1/(20-n) where n=years of employment. So in year 2 you count 1/19th of cumulative contributions and so on. This spreads the distortions in an actuarial fashion, but it doesn't account for the fact that you effectively have an offsetting liability on your household balance sheet (if you lose your job in year 19, you have no pension at all).
Neither is truly elegant: the first might lead you to oversave if you are employed long enough to get the pension. The second might lead you to undersave if you leave the job early. Personally, I'd probably prefer the first solution: you can always reevaluate the financial plan once you're fully vested.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Savings Percentage Calculation
Thanks. That's helpful. I don't want to count my chickens before they hatch. I guess I'll go with the first approach.vineviz wrote: ↑Sun Sep 08, 2019 11:36 amRon Ronnerson wrote: ↑Sun Sep 08, 2019 11:01 am For those who say they include employer matches in the calculation, how would you suggest handling pension contributions? I’m a teacher and don’t get any matches on my 403b or 457b. However, I do contribute toward a pension and so does my employer as well as the state. If I were to quit my job tomorrow, I could take out whatever I’ve contributed so far as well as the interest on those contributions (not that I would do this). I would not be able to get the contributions made by the employer or state if I were to do this, though. I’m eligible to retire with a pension in 10 years (but plan to work for another 15-17 years) and the size of my pension is definitely affected by the contributions made by parties other than myself. I’m expecting $100k/year in 2019 dollars around age 60 (includes COLA and 100% survivor benefits).
Any thoughts on how the pension contributions should be factored into a savings rate calculation?
There are two ways you could do this. Neither is strictly right or wrong, and they roughly equate to using a cash-flow method or an accrual method. Both illustrate potential problems with relying too heavily of savings rate "rules of thumb".
The first approach would be to not count the pension contribution at all until you're vested (e.g. in 2029 or whatever) and to count all the dollars that your employer+state have contributed up to that point as being both income and savings IN THAT YEAR. This is conservative in the sense that you aren't counting the contributions at all until you actually legally own them, but it'll give you a wild swing in savings rate in that year. You could end up with a savings rate of 747% (just making up numbers here) in one year and just 15% in the year before and 20% in the year after.
The second approach would be to phase in the numbers. If it takes 20 years from the day you start to be fully vested in the pension, in the first year you count 1/20th of the employer+state contributions as part of both income and savings. Every year the fraction increases such that it is 1/(20-n) where n=years of employment. So in year 2 you count 1/19th of cumulative contributions and so on. This spreads the distortions in an actuarial fashion, but it doesn't account for the fact that you effectively have an offsetting liability on your household balance sheet (if you lose your job in year 19, you have no pension at all).
Neither is truly elegant: the first might lead you to oversave if you are employed long enough to get the pension. The second might lead you to undersave if you leave the job early. Personally, I'd probably prefer the first solution: you can always reevaluate the financial plan once you're fully vested.
I want to make sure I'm understanding it correctly so I'll provide some numbers. I currently have an income around $120k ($110k from my job, $5k in interest, and $5k from other sources such as gifts and selling old things around the house). I save roughly $60k of this (includes 403b, 457b, traditional IRA, mortgage principal, and my share of pension contributions). So, currently, my savings rate is around 50%. I pay $2k for federal income taxes and $0 for California income taxes and consider taxes as part of my expenses.
Assuming my income and savings stay exactly the same in 2029 as today but I become eligible for a pension, I'd add up the total of what my employer+state have contributed up to that point and apply it to both the savings and the income for the year. Let's go with $700k as an estimate of what employer+state contribute over the 25 years (2004-2029) until I'm vested. So, my savings in 2029 would be $760k ($60k+$700k) and my income would be $820k ($120k+$700k) for a savings rate of 92.7% in 2029. The year after, it would fall back down to 50% if I keep saving at the same rate I have been.
Am I understanding this correctly?
Re: Savings Percentage Calculation
Your annual statements show your savings contributions, your tax forms show your income, and the rest was spent. Yes, taxes are an expense, as is the house payment that includes your property taxes.