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  • Savings Budget, post or pretax

    I have heard WCI recommend physicians save 20% of their income toward retirement. When making a financial plan or budget, is this recommendation based on gross income or post tax dollars. If one is in a W2 job with only a 401K, it seems achieving 20 percent of gross income might be more challenging.

    When one makes a budget, it is usually based on take home income. I am trying to create a financial plan and struggling whether i should be aiming for 20-30 percent of my gross or net income after taxes for all savings and investments, including 529s and more liquid investments. I aim to achieve financial independence but do not plan any early retirement and would also like to enjoy on life experiences with my family.

  • #2
    The answer is gross. It's at least 20% gross towards retirement, so anything you put in 529s don't count towards that 20%. Include any match you get in the 401k, but include it as part of your gross comp too, so it's in the denominator and the numerator. Max out a 401k, do the backdoor Roth IRA (x2 if married), see if you have a 457 or a 401a or access to the megabackdoor Roth IRA via your workplace 401k. If none of those three are an option, a regular taxable account is what you'd use to get to at least 20%.

    It makes sense to do your budget based on take home pay.
    Last edited by JBME; 05-02-2022, 08:07 AM.

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    • #3
      JBME ’s reply is textbook. 20% of gross towards retirement. Student loan payments, 529s, savings towards a down payment. None of these count as retirement savings. (You could quibble over the HSA if you don’t withdraw money until retirement.)

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      • #4
        Agree with above.

        Regarding your budget, that’s easy. It’s whatever you have left of gross income after taxes and retirement.

        How you allocate it is up to you, but that is the pot of money that you are working with.

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        • #5
          I concur with the above unless paying for college is one of your goals. In that case, I would include 529 savings.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Originally posted by jfoxcpacfp View Post
            I concur with the above unless paying for college is one of your goals. In that case, I would include 529 savings.
            Respectfully disagree. Money for the kids’ (or grandkids’) education is not money for your own living expenses in retirement. While you “own” the money as a 529 account holder, please don’t put that 529 money into the column or bucket of “money I’ll live off of when I stop working”.

            You still need to save 20% or more of gross income towards retirement. If I want to live on a boat in retirement, I shouldn’t spend 20% of gross income on a boat and pat myself on the back for saving enough for “retirement” expenses.

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            • #7
              Originally posted by jfoxcpacfp View Post
              I concur with the above unless paying for college is one of your goals. In that case, I would include 529 savings.
              Gonna quibble on 529’s. Nice goal, but not retirement savings unless your kid(s) education is going to fund your retirement.

              RS: retirement savings
              ER: Employee cash contributions (pre and post tax)
              EE: Employer contributions
              AGC:Adjusted gross comp
              RSR: retirement savings rate

              •RS= cash put into investments (EE+ER)
              •AGC=Gross comp + ER
              •RSR= RS/AGC
              Rules of thumb are personal of course.

              Budgeting:
              Gross comp- RS(20%) = spending
              Pay yourself first. Spending is personal of course. Bigger house better schools vs college savings or private schools and vacations.

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              • #8
                For highly compensated physicians, 20% for me would be a floor rather than a goal to aspire to.

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                • #9
                  20% of gross is my guideline. Remember it's a rule of thumb though. Maybe you need 22% or perhaps only 18%. The point is that the right answer is not 5% or 10%.

                  But you can count gross or net however you prefer. Doesn't matter to me. Be consistent and run the numbers to make sure you're saving enough to reach your goals.

                  20% of gross is adequate if you save over an entire career. If you start late or wish to FIRE, you're going to need a higher percentage to get to the same place.
                  Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                  • #10
                    Originally posted by Hank View Post

                    Respectfully disagree. Money for the kids’ (or grandkids’) education is not money for your own living expenses in retirement. While you “own” the money as a 529 account holder, please don’t put that 529 money into the column or bucket of “money I’ll live off of when I stop working”.

                    You still need to save 20% or more of gross income towards retirement. If I want to live on a boat in retirement, I shouldn’t spend 20% of gross income on a boat and pat myself on the back for saving enough for “retirement” expenses.
                    +1

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                    • #11
                      I dont think any one know 100% what the real answer is , 20% or more. But in a reality , saving a higher percentage earlier in life leaves you in a much better position when getting closer to the retirement years. Personally, late 40s and early 50s were much more expensive years for us with teenage kids and college costs. Live like a resident no longer applies and style of living increases. You will be much better off, if the bulk of your retirement savings is done by then, rather than trying to catch up during those years.

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                      • #12
                        Saving a higher percentage earlier in life also likely entitles you to save less than 20% (like 10-15%) later in life. If you are halfway to your FI number at age 40 or 45 and don’t plan to early retire you can reassess and perhaps save less than 20%

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