Savings-to-Expense Ratio Question

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JSparks
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Savings-to-Expense Ratio Question

Post by JSparks » Wed May 20, 2020 8:52 am

I've explored several ways of looking for the retirement goal line, and just for giggles I looked at the savings-to-expense ratio. Whether or not that method is valid now is irrelevant, but my questions are...

1. Should I include estimated future tax payments as an expense in this ratio?
2. Should I include the full tax deferred amount in the saving part of the ratio or should I deduct the estimated taxes from that amount?

jebmke
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Re: Savings-to-Expense Ratio Question

Post by jebmke » Wed May 20, 2020 9:11 am

I consider taxes an expense. Therefore, I don't tax-effect my asset values.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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jeffyscott
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Re: Savings-to-Expense Ratio Question

Post by jeffyscott » Thu May 21, 2020 8:34 am

I think you could do it either way, or a combination. I would just pick whatever is easier to figure out for your situation.

I'm not calculating that ratio, but looking at spending vs. assets and income and for my situation, I know the taxes will be $X per year on pension and SS income and can include that as an annual expense. While for IRA assets, I know that the assets will all be subject to about 20% tax if withdrawn. So I can use 80% of the value of that and then not have to include tax expense on any withdrawals.
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KlangFool
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Re: Savings-to-Expense Ratio Question

Post by KlangFool » Thu May 21, 2020 8:41 am

JSparks wrote:
Wed May 20, 2020 8:52 am
I've explored several ways of looking for the retirement goal line, and just for giggles I looked at the savings-to-expense ratio. Whether or not that method is valid now is irrelevant, but my questions are...

1. Should I include estimated future tax payments as an expense in this ratio?
2. Should I include the full tax deferred amount in the saving part of the ratio or should I deduct the estimated taxes from that amount?
JSparks,

The answer is highly dependent on

A) your annual expense.

B) Whether you choose to early retire

C) Do you have a pension?

At the lower annual expense (without taxes) level, below 50K to 60K per year, the taxes are too insignificant to matter. If you provide an answer for (A) to (C), you can calculate whether taxes matters.

I do not count taxes. My effective tax is less than 5% while I am working. It will be close to zero when I early retire.

KlangFool

UpperNwGuy
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Re: Savings-to-Expense Ratio Question

Post by UpperNwGuy » Thu May 21, 2020 8:43 am

jebmke wrote:
Wed May 20, 2020 9:11 am
I consider taxes an expense. Therefore, I don't tax-effect my asset values.
I agree.

H-Town
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Re: Savings-to-Expense Ratio Question

Post by H-Town » Thu May 21, 2020 10:18 am

JSparks wrote:
Wed May 20, 2020 8:52 am
I've explored several ways of looking for the retirement goal line, and just for giggles I looked at the savings-to-expense ratio. Whether or not that method is valid now is irrelevant, but my questions are...

1. Should I include estimated future tax payments as an expense in this ratio?
2. Should I include the full tax deferred amount in the saving part of the ratio or should I deduct the estimated taxes from that amount?
Before addressing the question, my approach to planning for the future is to be conservative. There is no right or wrong answer to planning, except the one that is overly optimistic. It's better to end up with too much money than not having enough money. As you get older, it may be more difficult to make more money as you did in your 30s and 40s.

So back to your question: tax will always be a factor. Fortunately, you have a control over how much tax you pay. Good tax planning pays off big way. So instead of playing with the saving rate math, maybe a better approach would be thinking about tax planning?

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abuss368
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Re: Savings-to-Expense Ratio Question

Post by abuss368 » Thu May 21, 2020 10:21 am

JSparks wrote:
Wed May 20, 2020 8:52 am
I've explored several ways of looking for the retirement goal line, and just for giggles I looked at the savings-to-expense ratio. Whether or not that method is valid now is irrelevant, but my questions are...

1. Should I include estimated future tax payments as an expense in this ratio?
2. Should I include the full tax deferred amount in the saving part of the ratio or should I deduct the estimated taxes from that amount?
Keep it simple! No one knows what future tax rates or laws will be. In addition, no one knows what the future returns (or losses) of the stock and bond markets will be.

I consider tax an expense that is paid during the year.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

annu
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Re: Savings-to-Expense Ratio Question

Post by annu » Thu May 21, 2020 11:40 pm

We save more than 60% of what we make after tax, bulk goes into mortgage.
Using mint helped us make sure we stick to this baseline, while still budgeting for fun activities as we are a young family with small kids.
Personally would recommend to watch how you do right now, and than tweak, instead of going for a number. You need to enjoy the journey and not just the destination.
I am sure there are more options to monitor tour expenses, pick one and see how you are doing right now and address things you feel are too much.

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