savings

[mukuka12]

I am a 1st year resident and I just read white coat investor. I have

 

1. He mentions saving between 20-30% of your income, does this all go towards my retirement funds?

2. I am trying to figure out how much will go towards my 403(b). My program is going throught TIAA-CREF and they are giving me two options

(a) Amount of paycheck %

(b) I elect 15-year lifetime catch-up option not to exceed the IRC section 402(g)8 limit and I have attached the calculation provided by my 403(b) company indicating I elect the special 15 year lifetime catch-up option this calendar year. I understand it is my responsinility to obtain this calculation annaully from my 403(b) company.

* which is my best option?

[TotallyBroke]

1. I think he is generally referring to "wealth building."  Retirement funds, paying down loans, etc can all be considered wealth building.  20-30% of your income should be going towards increasing your Net Worth.

2. If you are a 1st year resident, you don't have 15 years of service to your hospital so you don't qualify for option b.  Choose a and determine the amount you want to put in retirement.  However, I would strongly recommend you make sure you can maximize your Roth IRA ($5500) and a spouses Roth IRA ($5500) first.  If after Roth contributions, you can put more money away, by all means, throw it at the 403b.

[DMFA]

mukuka12 wrote:

I am a 1st year resident and I just read white coat investor. I have

 

1. He mentions saving between 20-30% of your income, does this all go towards my retirement funds?

2. I am trying to figure out how much will go towards my 403(b). My program is going throught TIAA-CREF and they are giving me two options

(a) Amount of paycheck %

(b) I elect 15-year lifetime catch-up option not to exceed the IRC section 402(g)8 limit and I have attached the calculation provided by my 403(b) company indicating I elect the special 15 year lifetime catch-up option this calendar year. I understand it is my responsinility to obtain this calculation annaully from my 403(b) company.

* which is my best option?

Click to expand...

1. Yes, that's what he means by "saving."  Some people extrapolate this to include all money that goes toward your net worth, including paying your debts and mortgage principal.  I don't agree with that extrapolation since the point of a savings rate is to calculate percentage of current income one would receive in retirement, but it's a relatively reasonable idea especially since it's tough to afford all that if you have those high expenses on a low-ish income.

2. If you are a first-year resident and there is no 403(b) matching or Roth 403(b) option, then you should consider doing a Roth IRA instead since you will be in a low bracket and a tax deduction will probably not be worth as much as tax-free withdrawal after tax-free growth.

Other things you should work to establish are a reasonable student loan repayment option (assuming you have federal loans, probably RePAYE) and an "emergency" fund usually defined as 3-6 months' expenses.

[urologyisgreat]

Why is the savings rate always discussed in terms of pre-tax figures? It seems that everyone's tax situation is different and the only relevant figure ought to be post-tax.

[Zaphod]

urologyisgreat wrote:

Why is the savings rate always discussed in terms of pre-tax figures? It seems that everyone’s tax situation is different and the only relevant figure ought to be post-tax.

Click to expand...

Really it is. Most on here talk about post tax since you can only do so much to effect the pretax, and as you note it makes a huge difference. Several note both but most focus on the part they control.

[DMFA]

urologyisgreat wrote:

Why is the savings rate always discussed in terms of pre-tax figures? It seems that everyone’s tax situation is different and the only relevant figure ought to be post-tax.

Click to expand...

Good point. I think that with the general recommendation usually being given to those less savvy regarding nuts-and-bolts of taxes and income, the "average" person may not really be able to figure their post-tax income as easily as they may know their pretax income. Also, many retirement account contributions are made using pretax income, so when they go to their HR/brokerage site to plug in their salary deferrals, it's mostly based on whole-number percent of pretax income. Also since most retirement accounts for high-income earners will be pretax, it generally allows for a more simple estimate.

You are right in that all that matters is the money that goes into your account after taxes and savings now, and the amount that goes into your account after taxes in retirement. The 20-30% is based on a calculation to replace 50% of previous pretax income after working for 30 years and earning 5%. That's a reasonable estimate since you won't be diverting for retirement anymore, so you're at 80%, then probably in a lower tax bracket, so 60%, then should have your mortgage paid, so 50% pretax is a pretty reasonable target.

Plus future post-tax investment income can be more complex to calculate since whether it's taxed at income, LTCG, or not at all is variable, and we don't now what future brackets will be...

So if you can do the above-basic but not-too-complicated figuring as to what your post-tax income will be in the future, then do it, since that's a higher-fidelity figure of what your "actual" money will be. But for most comers to a site focused on financial exposure and education, you will probably see us use the pretax figures more.

[Kamban]

urologyisgreat wrote:

Why is the savings rate always discussed in terms of pre-tax figures? It seems that everyone’s tax situation is different and the only relevant figure ought to be post-tax.

Click to expand...

Because a lot of the savings done is into retirement plans which is via pre tax dollars. So it makes sense to get a higher percentage of savings if you use pre tax figure.

 

You can control that post tax dollars depending on how much you want to put the pre tax dollars in retirement savings