Savings Percentage Calculation

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Topic Author
azianbob
Posts: 241
Joined: Tue Jan 15, 2019 6:53 pm

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)?

FrugalConservative
Posts: 189
Joined: Thu Aug 17, 2017 9:44 am

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).

9-5 Suited
Posts: 423
Joined: Thu Jun 23, 2016 12:14 pm

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.

runner3081
Posts: 2708
Joined: Mon Aug 22, 2016 3:22 pm

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.

Miguelito
Posts: 287
Joined: Thu Feb 27, 2014 1:21 pm

Re: Savings Percentage Calculation

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 see you added the company match. I was curious if people did that.

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.

9-5 Suited
Posts: 423
Joined: Thu Jun 23, 2016 12:14 pm

Re: Savings Percentage Calculation

Miguelito wrote:
Thu Sep 05, 2019 1:23 pm
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 see you added the company match. I was curious if people did that.

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 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.

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.

EnjoyIt
Posts: 3216
Joined: Sun Dec 29, 2013 8:06 pm

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.

Posts: 29
Joined: Wed Oct 24, 2018 10:11 am

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

finsterfolly
Posts: 24
Joined: Wed Aug 07, 2019 9:15 am

Re: Savings Percentage Calculation

EnjoyIt wrote:
Thu Sep 05, 2019 1:32 pm
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.
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.

LiterallyIronic
Posts: 1354
Joined: Sat Dec 05, 2015 10:36 am

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.

onthecusp
Posts: 742
Joined: Mon Aug 29, 2016 3:25 pm

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!

Swivelguy
Posts: 305
Joined: Sun Jan 18, 2009 11:37 pm

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)

Quantumfizz
Posts: 26
Joined: Wed Jul 26, 2017 9:26 pm

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/

vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Savings Percentage Calculation

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'd only argue that the 403b match should be in both the denominator and numerator, since it is part of your employment income.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Savings Percentage Calculation

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.
This is the truth.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

runner3081
Posts: 2708
Joined: Mon Aug 22, 2016 3:22 pm

Re: Savings Percentage Calculation

Miguelito wrote:
Thu Sep 05, 2019 1:23 pm
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 see you added the company match. I was curious if people did that.

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.
Savings for me = Retirement and 529. Retirement includes post-tax, pre-tax, etc (403B, 457B, ROTH, Brokerage).

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.

willthrill81
Posts: 15301
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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.
“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

runner3081
Posts: 2708
Joined: Mon Aug 22, 2016 3:22 pm

Re: Savings Percentage Calculation

vineviz wrote:
Thu Sep 05, 2019 2:29 pm
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'd only argue that the 403b match should be in both the denominator and numerator, since it is part of your employment income.
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).

smitcat
Posts: 4694
Joined: Mon Nov 07, 2016 10:51 am

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.

runner3081
Posts: 2708
Joined: Mon Aug 22, 2016 3:22 pm

Re: Savings Percentage Calculation

smitcat wrote:
Thu Sep 05, 2019 4:22 pm
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.
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.

cherijoh
Posts: 6379
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Savings Percentage Calculation

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
This is the definition I used as well while I was working. (I'm retired now).

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.

EnjoyIt
Posts: 3216
Joined: Sun Dec 29, 2013 8:06 pm

Re: Savings Percentage Calculation

I like how klangfool on this forum does it.
Every year he saves 1 year of expenses.

smitcat
Posts: 4694
Joined: Mon Nov 07, 2016 10:51 am

Re: Savings Percentage Calculation

runner3081 wrote:
Thu Sep 05, 2019 4:33 pm
smitcat wrote:
Thu Sep 05, 2019 4:22 pm
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.
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.
The rate in % is not relative - the amount you save vs the amount your expenses will be are relative.
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.

smitcat
Posts: 4694
Joined: Mon Nov 07, 2016 10:51 am

Re: Savings Percentage Calculation

EnjoyIt wrote:
Thu Sep 05, 2019 4:53 pm
I like how klangfool on this forum does it.
Every year he saves 1 year of expenses.
+1 … a % of savings vs future expenses

smitcat
Posts: 4694
Joined: Mon Nov 07, 2016 10:51 am

Re: Savings Percentage Calculation

runner3081 wrote:
Thu Sep 05, 2019 4:33 pm
smitcat wrote:
Thu Sep 05, 2019 4:22 pm
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.
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.
And maybe another way to view why using gross income is not a great metric.
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.

EnjoyIt
Posts: 3216
Joined: Sun Dec 29, 2013 8:06 pm

Re: Savings Percentage Calculation

smitcat wrote:
Thu Sep 05, 2019 5:01 pm
EnjoyIt wrote:
Thu Sep 05, 2019 4:53 pm
I like how klangfool on this forum does it.
Every year he saves 1 year of expenses.
+1 … a % of savings vs future expenses
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.

runner3081
Posts: 2708
Joined: Mon Aug 22, 2016 3:22 pm

Re: Savings Percentage Calculation

smitcat wrote:
Thu Sep 05, 2019 4:59 pm
runner3081 wrote:
Thu Sep 05, 2019 4:33 pm
smitcat wrote:
Thu Sep 05, 2019 4:22 pm
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.
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.
"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.
Counts as expenses in terms of calculating savings percentage, not calculating how much is needed in retirement - no relevance there.

smitcat
Posts: 4694
Joined: Mon Nov 07, 2016 10:51 am

Re: Savings Percentage Calculation

runner3081 wrote:
Thu Sep 05, 2019 5:43 pm
smitcat wrote:
Thu Sep 05, 2019 4:59 pm
runner3081 wrote:
Thu Sep 05, 2019 4:33 pm
smitcat wrote:
Thu Sep 05, 2019 4:22 pm
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.
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.
"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.
Counts 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?

Traveler
Posts: 815
Joined: Fri Aug 30, 2013 9:07 pm

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.

bltn
Posts: 605
Joined: Mon Feb 20, 2017 9:32 pm

Re: Savings Percentage Calculation

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.
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.

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.

nps
Posts: 715
Joined: Thu Dec 04, 2014 10:18 am

Re: Savings Percentage Calculation

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/
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.

runner3081
Posts: 2708
Joined: Mon Aug 22, 2016 3:22 pm

Re: Savings Percentage Calculation

smitcat wrote:
Thu Sep 05, 2019 6:16 pm
runner3081 wrote:
Thu Sep 05, 2019 5:43 pm
smitcat wrote:
Thu Sep 05, 2019 4:59 pm
runner3081 wrote:
Thu Sep 05, 2019 4:33 pm
smitcat wrote:
Thu Sep 05, 2019 4:22 pm
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.
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.
"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.
Counts 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?
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
Posts: 4694
Joined: Mon Nov 07, 2016 10:51 am

Re: Savings Percentage Calculation

runner3081 wrote:
Thu Sep 05, 2019 9:13 pm
smitcat wrote:
Thu Sep 05, 2019 6:16 pm
runner3081 wrote:
Thu Sep 05, 2019 5:43 pm
smitcat wrote:
Thu Sep 05, 2019 4:59 pm
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.
"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.
Counts 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?
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."
I think targets against actual future expenses are valuable , for many reasons.

rbaldini
Posts: 1075
Joined: Mon Mar 23, 2015 3:20 pm

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.

JediMisty
Posts: 421
Joined: Tue Aug 07, 2018 7:06 am
Location: Central NJ

Re: Savings Percentage Calculation

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)?
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.

JediMisty
Posts: 421
Joined: Tue Aug 07, 2018 7:06 am
Location: Central NJ

Re: Savings Percentage Calculation

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)?
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.

msk
Posts: 1449
Joined: Mon Aug 15, 2016 10:40 am

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.

pop77
Posts: 438
Joined: Wed Dec 12, 2007 7:57 pm

Re: Savings Percentage Calculation

vineviz wrote:
Thu Sep 05, 2019 2:31 pm
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.
This is the truth.
+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.

runner3081
Posts: 2708
Joined: Mon Aug 22, 2016 3:22 pm

Re: Savings Percentage Calculation

smitcat wrote:
Fri Sep 06, 2019 7:38 am
runner3081 wrote:
Thu Sep 05, 2019 9:13 pm
smitcat wrote:
Thu Sep 05, 2019 6:16 pm
runner3081 wrote:
Thu Sep 05, 2019 5:43 pm
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"
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.
Counts 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?
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."
I think targets against actual future expenses are valuable , for many reasons.
Agree, that I aim for, I do not aim for a current savings percent target.

Topic Author
azianbob
Posts: 241
Joined: Tue Jan 15, 2019 6:53 pm

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.

Jags4186
Posts: 4110
Joined: Wed Jun 18, 2014 7:12 pm

Re: Savings Percentage Calculation

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.
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

H-Town
Posts: 2286
Joined: Sun Feb 26, 2017 2:08 pm

Re: Savings Percentage Calculation

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.
Don't put too much stocks in other people's saving rate. They mean nothing to what you do.

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.

Miguelito
Posts: 287
Joined: Thu Feb 27, 2014 1:21 pm

Re: Savings Percentage Calculation

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
This is how I would do it, but savings rate is not something I typically calculate or track.

Dottie57
Posts: 7574
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Savings Percentage Calculation

Percentage of gross. Everything else deducted from your paycheck is an expense.

Posts: 92
Joined: Mon Feb 22, 2010 11:10 am

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
- 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.

mark39
Posts: 63
Joined: Tue Dec 13, 2016 7:45 pm

Re: Savings Percentage Calculation

runner3081 wrote:
Thu Sep 05, 2019 4:33 pm
smitcat wrote:
Thu Sep 05, 2019 4:22 pm
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.
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.
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.

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.

Ron Ronnerson
Posts: 1390
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

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?

vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

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

Ron Ronnerson
Posts: 1390
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Savings Percentage Calculation

vineviz wrote:
Sun Sep 08, 2019 11:36 am
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.
Thanks. That's helpful. I don't want to count my chickens before they hatch. I guess I'll go with the first approach.

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?

heyyou
Posts: 3597
Joined: Tue Feb 20, 2007 4:58 pm

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.