I know the concept of the savings rate has been debated in previous threads, so sorry if I missed the issue I'm bringing up here. Was doing a mid-year assessment this morning and started thinking more about the savings rate when I was calculating ours.
It doesn't make sense to use your own or compare savings rates - either based on gross or net - to indicate whether you're on track for meeting your retirement goals (also a function of asset allocation, time, planned spending). I feel like following the "rule of thumb" of 20% savings of gross for retirement is also too crude a method for determining anything meaningful - whether you're a good saver or whether you'll meet your retirement goals. For example, a high income earner should have a much easier time reaching that 20% of gross than someone earning $40k a year, and if they are highly risk averse, have less time to retirement or plan on living the high life in retirement that 20% savings rate guidance will likely have them fall short. IMO, if one begins with the end goal in mind (needs for retirement), as anyone should, then the savings rate is simply a derivative of your short term (year to year) goals to help you achieve the long term goal. So it seems that the savings rate has little use by itself for internal or external comparison. However, I can see use in utilizing a savings rate for internal/external checks on one's frugality and to perhaps push them further in that regard.
Any savings rate used for such purpose would have to be nuanced and scaled to income in order to be meaningful across time and income levels. To use % of gross is inappropriate because your total saving potential will be largely affected by taxation and credits, which is highly progressive. Thus, I think a tool for comparison would be something like:
((Total Savings/After-Tax Income) / After-Tax Income) x 100,000
The 100,000 is simply to bring the ratio to a reasonable decimal place.
Total savings = taxable, pre-tax retirement, HSAs, employer contributions, 529s, principal payments, etc.
After-Tax Income = Gross Income - (FICA + State + Federal Taxes)
I realize this isn't perfect, but it accounts for much of what is under the individual's control - which state they choose to live in, the job they chose (with certain retirement benefits), etc. - while also scrubbing out the effect of the vastly different tax rates we all pay.
Again, this should not affect anything from an individual retirement planning perspective. But I think it does serve as a useful tool for comparison across all income levels and might help drive someone to push themselves harder on the frugality scale. Thoughts?
It doesn't make sense to use your own or compare savings rates - either based on gross or net - to indicate whether you're on track for meeting your retirement goals (also a function of asset allocation, time, planned spending). I feel like following the "rule of thumb" of 20% savings of gross for retirement is also too crude a method for determining anything meaningful - whether you're a good saver or whether you'll meet your retirement goals. For example, a high income earner should have a much easier time reaching that 20% of gross than someone earning $40k a year, and if they are highly risk averse, have less time to retirement or plan on living the high life in retirement that 20% savings rate guidance will likely have them fall short. IMO, if one begins with the end goal in mind (needs for retirement), as anyone should, then the savings rate is simply a derivative of your short term (year to year) goals to help you achieve the long term goal. So it seems that the savings rate has little use by itself for internal or external comparison. However, I can see use in utilizing a savings rate for internal/external checks on one's frugality and to perhaps push them further in that regard.
Any savings rate used for such purpose would have to be nuanced and scaled to income in order to be meaningful across time and income levels. To use % of gross is inappropriate because your total saving potential will be largely affected by taxation and credits, which is highly progressive. Thus, I think a tool for comparison would be something like:
((Total Savings/After-Tax Income) / After-Tax Income) x 100,000
The 100,000 is simply to bring the ratio to a reasonable decimal place.
Total savings = taxable, pre-tax retirement, HSAs, employer contributions, 529s, principal payments, etc.
After-Tax Income = Gross Income - (FICA + State + Federal Taxes)
I realize this isn't perfect, but it accounts for much of what is under the individual's control - which state they choose to live in, the job they chose (with certain retirement benefits), etc. - while also scrubbing out the effect of the vastly different tax rates we all pay.
Again, this should not affect anything from an individual retirement planning perspective. But I think it does serve as a useful tool for comparison across all income levels and might help drive someone to push themselves harder on the frugality scale. Thoughts?
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