Do people calculate savings rate on gross income?

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KlangFool
Posts: 10439
Joined: Sat Oct 11, 2008 12:35 pm

Re: Do people calculate savings rate on gross income?

Post by KlangFool » Thu Nov 08, 2018 9:43 am

Folks,

My saving rate is based on my annual expense. I save 100% of my annual expense every year because I want to reach my goal in less than 25 years. The reason why I use this saving rate and method is that I want to balance saving and spending. I save as much as I spend is a good balance for me. I save enough and I do not over save.

So, if you choose a method to calculate your saving, please make sure that it does something for you.

KlangFool

smitcat
Posts: 1994
Joined: Mon Nov 07, 2016 10:51 am

Re: Do people calculate savings rate on gross income?

Post by smitcat » Thu Nov 08, 2018 9:56 am

KlangFool wrote:
Thu Nov 08, 2018 9:43 am
Folks,

My saving rate is based on my annual expense. I save 100% of my annual expense every year because I want to reach my goal in less than 25 years. The reason why I use this saving rate and method is that I want to balance saving and spending. I save as much as I spend is a good balance for me. I save enough and I do not over save.

So, if you choose a method to calculate your saving, please make sure that it does something for you.

KlangFool

I agree with KlangFool on this topic of using gross income as a guide.
Here is a post I just made on another related topic today...

I prefer to use a % of expenses but a % of net income would even be better than gross - rather than using a chart that takes gross income and spans many different income levels.

Why the chart is misleading...
Lets say I work as a nurse at a DR office and compare me to the Dr I work for.
Say we are typical in that we are both married and say I make $60K gross per year and he makes $1 million gross.
So we each save 50% of grosss as a working example.

Me at $60K gross per year:
I save $30K per year
My taxes are maybe $5K per year
My imputed expenses are then 25K per year (60-5-30=25)
Results are that I save 1.2 times my expenses each year - without any gains I reach 25X expenses in about 21 years

The Doctor has 1.0 Million gross per year:
- He saves $500K per year
- His taxes are maybe $400K per year (might be a little less)
- His imputed expenses per year are then $100K (1000K - 500- 400= 100)
- Results for him are that he saves 5 times his expenses each year - without any gains he reaches 25X expenses in 5 years

The chart may work for some due to many reasons but is is misleading for many if your retirement sucess is based upon expenses.

MindBogler
Posts: 669
Joined: Wed Apr 17, 2013 12:05 pm

Re: Do people calculate savings rate on gross income?

Post by MindBogler » Thu Nov 08, 2018 10:19 am

fulltilt wrote:
Thu Nov 08, 2018 7:49 am
If you make $2M a year, saving $1M a year is trivial. If you make $60k a year, saving $30k a year is hard.
In most states in the union, you'd lose nearly the first million in taxes even married filing jointly. You have State, Local, Federal, FICA (+Medicare additional tax) to contend with and, at that level of income, it is a lot money in absolute terms and also a high percentage of one's gross income. If you're curious, you are welcome to run the math (in fact I'd challenge you to do it). I think there is a dire misunderstanding of how progressive taxation works.

Then of course there is the obvious problem that people who currently make $2mm income undoubtedly don't live like the Millionaire Next Door. These would be investment bankers, executives and sports/entertainment figures. There would be some society component there that would compel those persons to spend more money on expensive clothes, cars, wine, dinners and other material possessions. And doing so might be tacitly understood to continue earning at that level. You don't show up to the country club driving a Hyundai and wearing an outfit from Target. It may sound easy on paper to save $1 million per year on a $2 million salary but, when you think it through, it seems to invalidate your premise.

Admiral
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Re: Do people calculate savings rate on gross income?

Post by Admiral » Thu Nov 08, 2018 10:30 am

My current rate of savings is approximately 120% of what my expected income needs will be that will not be covered by other sources (pension and SS) in retirement. I don't calculate what the percentage is (gross or net) since it's not super relevant, and we max out retirement accounts anyway.

For example:

Retirement per annum income requirement: $120,000
Pension: $30,000
Two SS payments: $60-70,000

Difference: $20-$30,000

Current savings: $50,000/per annum

Now this is a simplified view since it does not account for taxes, and also for the gap years between expected FI and when SS is claimed (which could be 7-10 years). In those years income will be lower, so withdrawals will be higher.

KlangFool
Posts: 10439
Joined: Sat Oct 11, 2008 12:35 pm

Re: Do people calculate savings rate on gross income?

Post by KlangFool » Thu Nov 08, 2018 10:41 am

MindBogler wrote:
Thu Nov 08, 2018 10:19 am

Then of course there is the obvious problem that people who currently make $2mm income undoubtedly don't live like the Millionaire Next Door. These would be investment bankers, executives and sports/entertainment figures.
MindBogler,

There are exceptions to every rule.

You could be a US ex-pat in the foreign countries. In those cases, you may not live like "The Millionaire Next Door" but as part of the ex-pat package, your living expense and income taxes are paid by the employer.

KlangFool

MindBogler
Posts: 669
Joined: Wed Apr 17, 2013 12:05 pm

Re: Do people calculate savings rate on gross income?

Post by MindBogler » Thu Nov 08, 2018 10:50 am

KlangFool wrote:
Thu Nov 08, 2018 10:41 am
MindBogler,

There are exceptions to every rule.

You could be a US ex-pat in the foreign countries. In those cases, you may not live like "The Millionaire Next Door" but as part of the ex-pat package, your living expense and income taxes are paid by the employer.

KlangFool
There is an edge case for any scenario but when the argument is predicated on a generalization, we shouldn't let the exceptions define the rule.

p.s. - "All generalizations are false, including this one."

randomguy
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Re: Do people calculate savings rate on gross income?

Post by randomguy » Thu Nov 08, 2018 11:49 am

fulltilt wrote:
Thu Nov 08, 2018 8:05 am
randomguy wrote:
Thu Nov 08, 2018 1:46 am


A hardworking firefighter makers a lot more than 60k/year where I live. The good ones are pushing 300k:)

In case you missed the pointed making a ton of money or saving a ton of money aren't really laudable events. The goal of saving isn't to get the number as high as possible. It is to get the number where it lets you live your life they way you want. For a lot of people that is in the 10-15% range. They will work their 35-40 years and then retire. Other people want to retire at 40. They need to think about saving 50%. Neither is more or less laudable.
Care to quote BLS statistics or your location to back up your $300k/yr claim?
It is public data that you can look up.

https://www.cbsnews.com/news/san-ramon- ... p-to-400k/
https://www.ocregister.com/2017/06/21/s ... then-some/

And so on. The system is set up so that it is cheaper to do overtime than hire people so racking up 200k+ of overtime is a pretty normal event.

randomguy
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Re: Do people calculate savings rate on gross income?

Post by randomguy » Thu Nov 08, 2018 12:01 pm

fulltilt wrote:
Thu Nov 08, 2018 7:49 am
I am saying at income level X, it is harder to save 50% the lower your income level goes. That was the original point and i stand by it. I don't see how it is even debatable.
Now it is harder the higher you income goes. Simple example
a) 5 million/year
fed taxes = 1.8 million
state taxes = 640 milion
FICA = 123k

2.575 million in taxes. It is literally impossible to save 50%:) There is a sweet spot in the 75-200k range where it gets sort of easy because you have low taxes and decent income but then it starts getting hard again.

randomguy
Posts: 6504
Joined: Wed Sep 17, 2014 9:00 am

Re: Do people calculate savings rate on gross income?

Post by randomguy » Thu Nov 08, 2018 12:09 pm

KlangFool wrote:
Thu Nov 08, 2018 9:43 am
Folks,

My saving rate is based on my annual expense. I save 100% of my annual expense every year because I want to reach my goal in less than 25 years. The reason why I use this saving rate and method is that I want to balance saving and spending. I save as much as I spend is a good balance for me. I save enough and I do not over save.

So, if you choose a method to calculate your saving, please make sure that it does something for you.

KlangFool
It is important to remember that your expenses are only loosely related to retirement expenses. In retirement you are potentially adding in things like health care and taxes and potentially taking out things like mortgage payments.

Your systems works out about the same as just saving 30-40% of the gross for most high earners (20-35% taxes is the rough range for most people in the 100-200k bracket). I would say just saving 35% is easier but we aren't talking about huge differences in complexity.

smitcat
Posts: 1994
Joined: Mon Nov 07, 2016 10:51 am

Re: Do people calculate savings rate on gross income?

Post by smitcat » Thu Nov 08, 2018 12:25 pm

randomguy wrote:
Thu Nov 08, 2018 12:01 pm
fulltilt wrote:
Thu Nov 08, 2018 7:49 am
I am saying at income level X, it is harder to save 50% the lower your income level goes. That was the original point and i stand by it. I don't see how it is even debatable.
Now it is harder the higher you income goes. Simple example
a) 5 million/year
fed taxes = 1.8 million
state taxes = 640 milion
FICA = 123k

2.575 million in taxes. It is literally impossible to save 50%:) There is a sweet spot in the 75-200k range where it gets sort of easy because you have low taxes and decent income but then it starts getting hard again.
"There is a sweet spot in the 75-200k range where it gets sort of easy because you have low taxes and decent income but then it starts getting hard again."

Yes - agreed, for max savings rate %'s on gross income it is a saddle with the range you indicate being the highest for the most part.

fulltilt
Posts: 181
Joined: Thu Dec 01, 2011 2:23 pm

Re: Do people calculate savings rate on gross income?

Post by fulltilt » Thu Nov 08, 2018 1:02 pm

MindBogler wrote:
Thu Nov 08, 2018 10:19 am
fulltilt wrote:
Thu Nov 08, 2018 7:49 am
If you make $2M a year, saving $1M a year is trivial. If you make $60k a year, saving $30k a year is hard.
In most states in the union, you'd lose nearly the first million in taxes even married filing jointly. You have State, Local, Federal, FICA (+Medicare additional tax) to contend with and, at that level of income, it is a lot money in absolute terms and also a high percentage of one's gross income. If you're curious, you are welcome to run the math (in fact I'd challenge you to do it). I think there is a dire misunderstanding of how progressive taxation works.

Then of course there is the obvious problem that people who currently make $2mm income undoubtedly don't live like the Millionaire Next Door. These would be investment bankers, executives and sports/entertainment figures. There would be some society component there that would compel those persons to spend more money on expensive clothes, cars, wine, dinners and other material possessions. And doing so might be tacitly understood to continue earning at that level. You don't show up to the country club driving a Hyundai and wearing an outfit from Target. It may sound easy on paper to save $1 million per year on a $2 million salary but, when you think it through, it seems to invalidate your premise.
This is just an approximation. I got lazy. The doctors are paying 37% for their entire income and the nurses are paying 0%. I think these approximations work in your favor, yes?

Here are the numbers that i came up with as a rough estimate. I will note that neither example takes into consideration health insurance premiums.

What am i missing?

Code: Select all

2 doctors, $1,000,000 each
Total Tax $849,788.80 
Total Tax Rate 42%
Annual Take Home $113,211.20
Monthly Take Home $9,434.27


2 nurses, $30,000 each
Total Tax  $4,590.00 
Total Tax Rate 8%
Annual Take Home  $25,410.00 
Monthly Take Home  $2,117.50  

LarryAllen
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Location: State of Confusion

Re: Do people calculate savings rate on gross income?

Post by LarryAllen » Thu Nov 08, 2018 1:04 pm

Too much thinking for me. I save a lot but not as much as I wish I did. Net, gross, whatever.

Admiral
Posts: 1396
Joined: Mon Oct 27, 2014 12:35 pm

Re: Do people calculate savings rate on gross income?

Post by Admiral » Thu Nov 08, 2018 1:09 pm

fulltilt wrote:
Thu Nov 08, 2018 1:02 pm
[

This is just an approximation. I got lazy. The doctors are paying 37% for their entire income and the nurses are paying 0%. I think these approximations work in your favor, yes?

Here are the numbers that i came up with as a rough estimate. I will note that neither example takes into consideration health insurance premiums.

What am i missing?

Code: Select all

2 doctors, $1,000,000 each
Total Tax $849,788.80 
Total Tax Rate 42%
Annual Take Home $113,211.20
Monthly Take Home $9,434.27


2 nurses, $30,000 each
Total Tax  $4,590.00 
Total Tax Rate 8%
Annual Take Home  $25,410.00 
Monthly Take Home  $2,117.50  
Say what? So you've shown combined income and taxes but only a single take home?

A physician with $1m annual income could clear $500k, save $250k, and live on $20k per month.

fulltilt
Posts: 181
Joined: Thu Dec 01, 2011 2:23 pm

Re: Do people calculate savings rate on gross income?

Post by fulltilt » Thu Nov 08, 2018 1:17 pm

Admiral wrote:
Thu Nov 08, 2018 1:09 pm
fulltilt wrote:
Thu Nov 08, 2018 1:02 pm
[

This is just an approximation. I got lazy. The doctors are paying 37% for their entire income and the nurses are paying 0%. I think these approximations work in your favor, yes?

Here are the numbers that i came up with as a rough estimate. I will note that neither example takes into consideration health insurance premiums.

What am i missing?

Code: Select all

2 doctors, $2,000,000 total
Total Tax $849,788.80 
Total Tax Rate 42%
Annual Take Home $113,211.20
Monthly Take Home $9,434.27


2 nurses, $60,000 total
Total Tax  $4,590.00 
Total Tax Rate 8%
Annual Take Home  $25,410.00 
Monthly Take Home  $2,117.50  
Say what? So you've shown combined income and taxes but only a single take home?

A physician with $1m annual income could clear $500k, save $250k, and live on $20k per month.
$2M total income less $850k in taxes less $1M in savings in taxable is about $150k leftover. In this case, the $113k is due to the fact that these aren't regular doctors, they are Bogleheads so they max their 401ks too. :wink:

MindBogler
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Joined: Wed Apr 17, 2013 12:05 pm

Re: Do people calculate savings rate on gross income?

Post by MindBogler » Thu Nov 08, 2018 1:58 pm

fulltilt wrote:
Thu Nov 08, 2018 1:17 pm
$2M total income less $850k in taxes less $1M in savings in taxable is about $150k leftover. In this case, the $113k is due to the fact that these aren't regular doctors, they are Bogleheads so they max their 401ks too. :wink:
Here's a neat tool that can approximate the answer to this question: https://smartasset.com/taxes/income-taxes

smitcat
Posts: 1994
Joined: Mon Nov 07, 2016 10:51 am

Re: Do people calculate savings rate on gross income?

Post by smitcat » Thu Nov 08, 2018 2:08 pm

MindBogler wrote:
Thu Nov 08, 2018 1:58 pm
fulltilt wrote:
Thu Nov 08, 2018 1:17 pm
$2M total income less $850k in taxes less $1M in savings in taxable is about $150k leftover. In this case, the $113k is due to the fact that these aren't regular doctors, they are Bogleheads so they max their 401ks too. :wink:
Here's a neat tool that can approximate the answer to this question: https://smartasset.com/taxes/income-taxes
Nice tool I use it myself for general comparisons but it will not take into account that the Dr. is likely self employed and paying both sides of FICA.

MindBogler
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Joined: Wed Apr 17, 2013 12:05 pm

Re: Do people calculate savings rate on gross income?

Post by MindBogler » Thu Nov 08, 2018 6:22 pm

smitcat wrote:
Thu Nov 08, 2018 2:08 pm
Nice tool I use it myself for general comparisons but it will not take into account that the Dr. is likely self employed and paying both sides of FICA.
Or that the hypothetical doctor is also an extreme outlier as most physicians never make anywhere near $1 million / yr! :P

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birdog
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Re: Do people calculate savings rate on gross income?

Post by birdog » Sat Nov 10, 2018 10:15 am

I use take home pay, not gross income. I can't save a percentage of money that I'm never given (tax withheld).

Some articles on this topic:

https://www.choosefi.com/how-to-calcula ... ings-rate/

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

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CyclingDuo
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Re: Do people calculate savings rate on gross income?

Post by CyclingDuo » Sat Nov 10, 2018 10:37 am

smitcat wrote:
Thu Nov 08, 2018 9:56 am
KlangFool wrote:
Thu Nov 08, 2018 9:43 am
Folks,

My saving rate is based on my annual expense. I save 100% of my annual expense every year because I want to reach my goal in less than 25 years. The reason why I use this saving rate and method is that I want to balance saving and spending. I save as much as I spend is a good balance for me. I save enough and I do not over save.

So, if you choose a method to calculate your saving, please make sure that it does something for you.

KlangFool

I agree with KlangFool on this topic of using gross income as a guide.
Here is a post I just made on another related topic today...

I prefer to use a % of expenses but a % of net income would even be better than gross - rather than using a chart that takes gross income and spans many different income levels.

Why the chart is misleading...
Lets say I work as a nurse at a DR office and compare me to the Dr I work for.
Say we are typical in that we are both married and say I make $60K gross per year and he makes $1 million gross.
So we each save 50% of grosss as a working example.

Me at $60K gross per year:
I save $30K per year
My taxes are maybe $5K per year
My imputed expenses are then 25K per year (60-5-30=25)
Results are that I save 1.2 times my expenses each year - without any gains I reach 25X expenses in about 21 years

The Doctor has 1.0 Million gross per year:
- He saves $500K per year
- His taxes are maybe $400K per year (might be a little less)
- His imputed expenses per year are then $100K (1000K - 500- 400= 100)
- Results for him are that he saves 5 times his expenses each year - without any gains he reaches 25X expenses in 5 years

The chart may work for some due to many reasons but is is misleading for many if your retirement sucess is based upon expenses.
The chart in question was this one:

Image

Comes from JPMorgan's 2016 Guide to Retirement
https://am.jpmorgan.com/blob-gim/138328 ... JP-GTR.pdf

In the JPMorgan document, this is included with regard to the chart so you understand what JPMorgan is basing it on:

This chart is for illustrative purposes only and must not be relied upon to make investment decisions. J.P. Morgan’s model is based on J.P. Morgan Asset Management’s (JPMAM) proprietary long-term capital market assumptions (10-15 years). Household income replacement rates are derived from an inflation-adjusted analysis of: Consumer Expenditure Survey (BLS) data (2011-2014); Social Security benefits using modified scaled earnings in 2016 for a single wage earner at age 65 and a spousal benefit at age 62 reduced by Medicare Part B premiums; and 2016 OASDI and FICA taxes. Households earning $30,000 will need to replace at least 16% of their preretirement income; $50,000 23%; $75,000 34%; $100,000 38%; $150,000 45%; $200,000 51%; $250,000 55%; $300,000 57%. The income replacement needs may be lower for households in which both spouses are working and the second spouse’s individual benefits are greater than their spousal benefit. Single household income replacement needs may vary as spending is typically less than a two-spouse household; however, the loss of the Social Security spousal benefit may offset the spending reduction. Consult with a Financial Advisor for a more personalized assessment. Allocations, assumptions and expected returns are not meant to represent JPMAM performance. Given the complex risk/reward tradeoffs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve.

The actionable part of saving as this thread is discussing, is coming up with a savings rate that strikes a balance between your current expenses, lifestyle, and being able to save for your future based on your goals. Calling it savings rate, or an actual dollar amount seems to be constrained by everyone's unique individual situation when you factor in pension, SS, rental income, other savings, small business, real estate, etc... .
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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