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Savings rate

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  • Savings rate

    Happy thanksgiving!

    Newbie question here. I’d like to calculate our annual savings rate for the first time and am wondering how most people do this. I was planning to include contributions to the following:
    - Roth IRA
    - 403b employee contribution
    - Taxable investment account
    - Increase in cash savings

    Things I was planning to exclude:
    - 403b employee match
    - 529 fund
    - Additional cash earmarked for specific items (down payment or car savings, etc)

    When people suggest to save 20% of your income, is this how they are calculating? I assume this means 20% of pre-tax dollars?


  • #2
    Well, ultimately you can calculate it however you want.  I personally do include employee matches as part of my savings rate (because you have to save to get that match in the first place and it does go into a savings account).  I also would include a 529 or any special savings for down payments, etc, because you may end up not using that cash for the intended purpose and perhaps it could be saved for retirement instead.

    I don't know if it's better to use the pre or post tax figure for calculating the savings rate, so I just calculate both so I know where I stand.


    • #3
      if you include employee match in the numerator, you need to include it in your denominator.

      if you can save for retirement an amount equal to your annual pretax spending, you’ll be golden.


      • #4
        I calculate all of our contributions to our retirement accounts and any additional cash in our bank account compared to last year on Jan 1.  Divide that by our gross income.


        • #5
          Yup. Take your gross income...multiply by 0.2...make sure you save that number or more.


          • #6
            Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.


            • #7
              I've got a savings rate calculator that is Excel based. You can enter your info online or download the spreadsheet and adjust it to your liking.

              I would not exclude the employer match. That is essentially a portion of your compensation of which you are saving 100%.




              • #8
                The most "true" way to calculate it is amount that actually went into accounts to be used *for retirement* divided by gross (pretax) income.

                Employer match would be in both the numerator and denominator.

                Some people try to pad their numbers by counting money that was put towards student loans, mortgage, or any other debt. That's misleading. Until that money is actually going into your retirement accounts and earning actual compound interest, it shouldn't be calculated.

                All things considered, though, the "savings rate" is just a rule of thumb. It has myriad shortcomings based on many assumptions and takes into account static figures (years worked, estimated future CAGR, safe withdrawal rate, no assumption of Roth or LTCG holdings, change in income over time). The basic assumption is saving 20% for 30 years at 5% CAGR at a 4% withdrawal rate gives you 56% of pretax income so that's the going advice for the average person who doesn't want to think too much about it. If you want to get down to brass tacks to determine exactly what you need, then you've gone beyond the use of basic rules of thumb.

                So: KISS and put ensure 1/5 of what you gross ends up specifically earmarked for retirement, or crunch numbers and never mind the rules of thumb.


                • #9
                  Once you get to the point of actually calculating your savings rate with the level of detail in the OP, the savings rate has lost its value. The main point of the savings rate is to let people with abysmally low or non-existent savings rates know they should be saving more. The 20% rule of thumb provides a good guideline for the beginner along these lines. By the time you are wondering whether your “true” savings rate is 18% or 23%, it’s time to graduate into goal setting (e.g. retirement account of $2M by 2030, 529 of $500k by 2027, etc.) and actively contributing dollars to investment accounts to achieve these goals. Savings rates provide limited value in such planning.

                  In short, I would spend no time thinking about these types of questions and move on to figuring out whether your current dollar amount of savings each month/year will let you achieve your goals in the time frame you want.


                  • #10
                    I shoot for 20 percent of gross into retirement accounts. My savings rate is higher because it includes extra mortgage payments, increase in cash for emergency fund, etc. Really, just pick a way to calculate and stick with it. Don't use it to compare yourself to others, just use it to compare to yourself year after year and to help you decide how much you will need to save for retirement.