Author Topic: Saving 10% of Post-Tax Income Isn't A Starting Point  (Read 5969 times)

kayvent

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Saving 10% of Post-Tax Income Isn't A Starting Point
« on: February 16, 2017, 06:27:09 PM »
Tax season has arrived and with it some comical articles. This one from the Financial Post is about saving in RRSP, TFSA or paying down debt (for Americans, this is similar to talks about 401K vs Roth IRA vs Debt repayment).

This article literally made me laugh out loud. My daughter looked at me with concern.

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If you’re saving for retirement, the number one most important thing to do is to make it a habit. “I recommend 10 per cent of your after tax income,” Ahmed-Haq says.

This is what made me laugh. Ten percent of post-tax income is about seven percent pre-tax. Yeah....a fifty-nine year working life........

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Instead, watch your money grow tax free in a TFSA. “When you are in a higher marginal tax bracket, withdraw your money from your TFSA (tax free) and contribute that to your RRSP.”

Or you could save more than 7% of your income and max out both........

The federal tax brackets are at 12K, 57K, 102K, 152K, and 212K (if you have only the basic deduction). They jump by 4-5%. Provincial brackets are similar. Ignoring that tax rates have massively changed in Canada over the past twenty years and ignoring that many people don't significantly jump brackets after awhile, I'm kinda baffled with this "don't contribute to RRSPs until later in your career" pitch I hear often. Compounding growth would dictate it is better to save earlier than later.

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“Saving $50 a week into a TFSA where you’re making 2 per cent and leaving $50 on a credit card where you’re paying 20 per cent — that does not work.”

WADE! WADE! What the hell are you using the TFSA for? I thought you were using it as a retirement savings vehicle; why does this illustration only have 2%? A GIC pays _almost_ that much. I appreciate the note about paying off high interest debt but I'm worried. Two percent returns with seven percent savings rates are scary.......
« Last Edit: February 16, 2017, 06:28:45 PM by kayvent »

scottish

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #1 on: February 16, 2017, 07:46:35 PM »
I'm not sure how you're interpreting the "don't contribute to RRSPs until later in your career" pitch.   If you take it to mean don't save until later in your career, then you're correct, that's just wrong.   If you take it to mean save, but do it outside of the RSP, that requires a bit of analysis.

There's tax liability on your RSP.   So if you're in a lower income bracket such as $40,000 you may be better to wait until you're in a higher income bracket, such as $120,000 before making contributions.    Capital gains in a cash account will also grow untaxed until you trigger them, so tax savings on the growth isn't necessarily as important as deferring income at a 40% marginal tax rate and withdrawing it at a 20% marginal tax rate.

Additionally the capital gains and dividends you earn in your RSP will be taxed at your full marginal tax rate on withdrawal, whereas they are much more lightly taxed in a cash account.   

Work some scenarios in detail.   Don't ignore the rumours that the government is going to increase the tax rate on capital gains - this may mess with my plans if it happens.   (Why can't they just spend less on frivolous things?   $500M for a 150 year party?   Give me a break!)

kayvent

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #2 on: February 17, 2017, 04:13:53 AM »
I'm not sure how you're interpreting the "don't contribute to RRSPs until later in your career" pitch.   If you take it to mean don't save until later in your career, then you're correct, that's just wrong.   If you take it to mean save, but do it outside of the RSP, that requires a bit of analysis.

I am saying it is probably better, or at least not horribly inefficient, to max out tax-deferred accounts as early as possible. (For someone making 60K, that is a 27% gross savings rate or about 21% gross.) I think the math isn't very much against not-delaying RRSP contributions. Say if you know your income will triple over the next ten years (ex. 40k ->120K) and your marginal tax rate will increase by 20%. If one's investments grow at 5% per year annualized, it is far better to invest it earlier than to save more later. (And if the tax write-off really is the decide factor, in Canada you can delay the deduction for a later tax year.)

Laura33

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #3 on: February 18, 2017, 08:10:35 AM »
I share your pain.  I don't know about the Canadian specifics, but I really really wish people didn't make it sound like 10% savings is a huge win and a great target.  I always saved 15-20% from the get-go, and I thought I was doing great!  If I had had other voices saying, "dude, you are making a good professional income, if you put aside half of it, you can be done in your 40s," I would be *so* much better off today. 

Yeah, ok, not that I am in a bad place.  But we had a lot of slack in the budget that we could have cut if we hadn't thought we were already doing great (or, more specifically, it would have helped me push DH early on on what is a "reasonable" savings rate).
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daverobev

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #4 on: February 18, 2017, 10:12:20 AM »
You have to remember that Canada has a very generous retirement system - CPP plus OAS is enough to "keep you from living on cat food", as I've seen written a few times.

Maxing your TFSA, if you're planning on a normal 30 year working life, is probably enough. It's not FI/RE but.. most people aren't fussed with that.
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moof

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #5 on: February 18, 2017, 11:13:08 AM »
I wish I could punch several people in the nose who fed me that 10% crap.  It works out if you work toll your 60's and are just augmenting SSA, but that is about it.

kayvent

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #6 on: February 18, 2017, 12:17:02 PM »
You have to remember that Canada has a very generous retirement system - CPP plus OAS is enough to "keep you from living on cat food", as I've seen written a few times.

Maxing your TFSA, if you're planning on a normal 30 year working life, is probably enough. It's not FI/RE but.. most people aren't fussed with that.

I'm fairly happy with how the CPP is run but at the same time I find it hard to feel a sense of security in it. I expect like the UK and the previous Canadian Conservative government did, that programs like OAS and CPP will gradually move to age 70 or higher. It is unnatural to trust something that I won't start gathering until I'm almost triple my age. MMM has written that he sees Social Security as a backup plan and not something in his main calculations. This is how I feel about CPP: I won't know what it will look like, I may never collect it (death), but I know it will exist to some extent.

JAYSLOL

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #7 on: February 19, 2017, 08:33:49 PM »
You have to remember that Canada has a very generous retirement system - CPP plus OAS is enough to "keep you from living on cat food", as I've seen written a few times.

Maxing your TFSA, if you're planning on a normal 30 year working life, is probably enough. It's not FI/RE but.. most people aren't fussed with that.

I'm fairly happy with how the CPP is run but at the same time I find it hard to feel a sense of security in it. I expect like the UK and the previous Canadian Conservative government did, that programs like OAS and CPP will gradually move to age 70 or higher. It is unnatural to trust something that I won't start gathering until I'm almost triple my age. MMM has written that he sees Social Security as a backup plan and not something in his main calculations. This is how I feel about CPP: I won't know what it will look like, I may never collect it (death), but I know it will exist to some extent.

Thats how i feel about CPP and OAS.  I don't mind that they are there as a backup, but I don't factor them or any form of inheritance into my FIRE calculations because I like the idea of not needing them.  (bonus money!)

talltexan

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #8 on: February 20, 2017, 07:24:24 AM »
I think the big problem with using social security for planning is the length of time. It's very difficult to project your investment returns for decades within the margin of error of social security. A bigger worry than social security going bankrupt is inflation being great enough that the real value of the social security payments will be a lot less than expected.

High inflation shouldn't be a problem if you have enough exposure to stocks (and even less of a problem if you choose to not pay your mortgage down early).

Saskatchewstachian

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #9 on: February 23, 2017, 09:47:49 AM »
A question to the group, where did you first hear to save 10%?

Maybe it is a generational thing but I never really heard an exact figure growing up or in much of my financial education. Typically it was closer to the "Max out your Retirement Accounts" which is 18%. Then when TFSA's came along I knew that they were good for saving (without really knowing anything about them), so I should be putting money into there as well.

So reaching backing into my memory it seems like most of the advice always hovered around =>20%.

letired

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #10 on: February 23, 2017, 10:09:09 AM »
A question to the group, where did you first hear to save 10%?

Maybe it is a generational thing but I never really heard an exact figure growing up or in much of my financial education. Typically it was closer to the "Max out your Retirement Accounts" which is 18%. Then when TFSA's came along I knew that they were good for saving (without really knowing anything about them), so I should be putting money into there as well.

So reaching backing into my memory it seems like most of the advice always hovered around =>20%.

My grandfather told me 10%, and it was emphasized that you had to save 10% of EVERY DOLLAR YOU EVER GOT. I'm not 100% sure he finished high school, was almost definitely working by 18, and ended up on the skilled end of manufacturing before he retired sometime in his 60s. He cared about money A LOT and spent a lot of effort/time tending to his financial life (in addition to being thrifty as hell and DIYing EVERYTHING) and took really good care of his family and grandkids. In the context of 'work from ages 18-65' and a good but not high-paying job in the late 1900's, I think 10% is/was probably a reasonable rule of thumb. In the context of my life, it's a less helpful rule, both since I didn't start fulltime work till after college, and then took a few years off to go to grad school where I was able to save some money, but 10% all the time that would never be touched was Not Happening.

Travis

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #11 on: February 23, 2017, 10:34:12 AM »
I've seen the 10% argument since high school and if you saved 20% then you were doing "very well."  Every once in a while a discussion like this will pop up here on how low of a bar 10% is, but you have to remember they keep saying it because not everyone does even this minimal amount.
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talltexan

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #12 on: February 24, 2017, 08:38:41 AM »
The 10% people aren't counting the equity on their housing payments towards their savings rate.

Of course, they will remind you that they all bought houses when mortgage rates were 14.95%...

Laura33

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #13 on: February 24, 2017, 09:38:06 AM »
A question to the group, where did you first hear to save 10%?

Maybe it is a generational thing but I never really heard an exact figure growing up or in much of my financial education. Typically it was closer to the "Max out your Retirement Accounts" which is 18%. Then when TFSA's came along I knew that they were good for saving (without really knowing anything about them), so I should be putting money into there as well.

So reaching backing into my memory it seems like most of the advice always hovered around =>20%.

Growing up -- 1970s -- from parents/grandparents.  We didn't have 401(k)s -- when I started, the only option was a traditional IRA with a $2K limit. [now you kids get off my lawn] 

In retrospect, I think their advice was perfectly appropriate for the world they lived in.  My grandpa went to work for GE as an engineer right out of high school and stayed there his whole career; my dad came out of college and went to work for DuPont his whole career.  Both of them retired with pensions and SS.  In that world, additional personal savings is largely for pre-retirement expenses like cars and homes -- remember, people didn't have nearly as much access to credit back then, so there was a much more prevailing assumption that you'd just save up to pay cash for whatever it was [or maybe that was just my family -- very midwestern conservative].  And then maybe when you retire you have a little nest egg left over to cover big expenses and a few luxuries and such.  I think back then, if you were saving 10% for retirement on top of the rest you were doing fantastic.

OTOH, although I obviously didn't know it at the time, while I was growing up that system was shifting to "you're on your own, kid."  I've never had a pension even as an option, and I've watched SS benefits be cut back more and more over my lifetime.  So the advice that I grew up with -- which worked great for them -- was *completely* inappropriate for the world I ended up living in.

What I don't understand is how people are still giving that advice today, now that we know the world has changed.  Makes no sense at all. 
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11ducks

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #14 on: February 26, 2017, 05:12:36 AM »
I first heard the 10% rule circa 1997, in Friends (the one where Monica loses her job).
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talltexan

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #15 on: February 27, 2017, 08:11:37 AM »
People should have been saving less in the past because inflation was higher...the impact on your future of the nest egg wouldn't be as great when you lose a greater portion of it to inflation.

Hunny156

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #16 on: February 27, 2017, 01:15:51 PM »
Not sure exactly where I heard it, but it was probably during the few years that I worked for Financial Advisors while still in college, so around 1996.  I took it to heart and made it my low bar for savings (15% would be the high bar in those days), I recall being really excited upon landing my first job just so I could invest in a 401K.  I also remember my older co-workers being amused that I was bothering so early.  In hindsight, that was dumb.  Other than my school loans, I still lived at home and was driving my first car that my parents had given me, which I considered "ancient" at the time.  (It was maybe 9 years old, although it did have some major mechanical issues).

Now I'm proud to drive a 16 year old car and save 6-8x the "recommended" amount.  Times have changed!  :)

MilesTeg

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #17 on: February 27, 2017, 01:20:07 PM »
Sure it is. Not a great starting point, but significantly more than most people actually do... All great journeys start with a single step.

talltexan

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #18 on: February 27, 2017, 02:07:12 PM »
I've questioned that 6% figure that MMM cites as the national average. The average savings rate would be calculated by including a lot of households who are dissaving already because they're retired, not just the spendy folks who are in the accumulation phase. There could be a lot more saving going on than we realize (although, yes, there are a lot of big trucks around here in Charlotte).

Of course, this makes the saving 10% people seem even worse off because they think they're above-average, and they might not be.

kayvent

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #19 on: February 27, 2017, 03:06:49 PM »
Not sure exactly where I heard it, but it was probably during the few years that I worked for Financial Advisors while still in college, so around 1996.  I took it to heart and made it my low bar for savings (15% would be the high bar in those days), I recall being really excited upon landing my first job just so I could invest in a 401K.  I also remember my older co-workers being amused that I was bothering so early.  In hindsight, that was dumb.  Other than my school loans, I still lived at home and was driving my first car that my parents had given me, which I considered "ancient" at the time.  (It was maybe 9 years old, although it did have some major mechanical issues).

Now I'm proud to drive a 16 year old car and save 6-8x the "recommended" amount.  Times have changed!  :)

A few years ago I started my first corporate job. Except for one person, literally everyone in my office was ten years my senior. Some old enough to be my parents. Being so young, I asked a guy what advice he'd give to me. Some nugget of wisdom or career advice that took him years to find. Some mistake he made that I could avoid. To my shock his response was not in any way career related. It was that I should save as much as early as possible because of compounding interest.

talltexan

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #20 on: February 28, 2017, 08:41:50 AM »
One of my co-workers sent me here.

A different one told me about when he was about my age (in 1990) and received a big promotion. Instead of upping his lifestyle, he took the 6% and basically cranked up his 401(k) contributions with it (so raised it from 9% to 15%). When he told me this, he'd basically completed 20 years of these, which is not mustachian, but certainly more responsible than what we think of as "average".

He was in a position of strength last year when voluntary early retirement (which he took) was offered by our employer.

kayvent

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #21 on: February 28, 2017, 06:16:28 PM »
I have a news app on my phone that I read. A little gem about RRSPs popped up into it today (http://www.moneysense.ca/save/10-rrsp-questions-answered/image/4/).

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In your 20s, contributing shouldn’t be a priority but by age 35, you would have to start putting $10,500 a year into your RRSPs to reach a reasonable retirement goal of $500,000

I did the math. They are assuming a 3% growth (let's assume this is all adjusted for inflation circa 2017 dollars). For a site called MoneySense, this kinda shocked me. A similar goal could be obtained by someone putting away 5500 (the TFSA limit) starting at age 20. Or 3500 if you assume 7% growth and want to equal what 10500/yr@7%@Age 35 would be. Or 1600 per year if you assume 7% and start at 20......

I am kinda horrified with that financial advice................literally.

anorman79

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #22 on: March 01, 2017, 07:40:59 PM »
Considering how pathetic savings rates are for the vast majority of the population 10% probably is a good starting point. It would be a vast improvement for like 95% of the population.

Saskatchewstachian

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Re: Saving 10% of Post-Tax Income Isn't A Starting Point
« Reply #23 on: March 02, 2017, 10:58:03 AM »
I have a news app on my phone that I read. A little gem about RRSPs popped up into it today (http://www.moneysense.ca/save/10-rrsp-questions-answered/image/4/).

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In your 20s, contributing shouldn’t be a priority but by age 35, you would have to start putting $10,500 a year into your RRSPs to reach a reasonable retirement goal of $500,000

I did the math. They are assuming a 3% growth (let's assume this is all adjusted for inflation circa 2017 dollars). For a site called MoneySense, this kinda shocked me. A similar goal could be obtained by someone putting away 5500 (the TFSA limit) starting at age 20. Or 3500 if you assume 7% growth and want to equal what 10500/yr@7%@Age 35 would be. Or 1600 per year if you assume 7% and start at 20......

I am kinda horrified with that financial advice................literally.

oh no, my eyes, my eyes!!! I should have known better but clicked on another link in the article above about "how much to have in a RRSP at each age" the and answers;
  • 25yo - $0
  • 35yo - $0
  • 45 $121,500
  • 55 $283,500
  • 65 $500,000

How is that sound advice!? If it was offset with something like "Investing in a TFSA is a better option at a young age because you are most likely paying less tax" then maybeeeee it might be a decent guideline. Just very surprised by this.