Author Topic: Quick clarifying question on calculating savings rates  (Read 1710 times)

newgirl

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Quick clarifying question on calculating savings rates
« on: January 10, 2018, 10:29:31 AM »
When figuring out what percentage of our income we're saving we are supposed to use take home pay - is it right that is gross pay minus taxes, but all other deductions added back in (dependent care FSA, health insurance, etc) regardless of whether the deductions are tax advantaged?

Are we allowed to include employer contribution to a 401k in our savings rate? For example, if I am contributing 7% and employer is contributing 8% (to answer anticipated comments, yes my employer contributes 8%, yes I am ramping the contributions up this year, yes I am contributing enough to get the full 8% match), do I count that as a savings rate of 15%? Or do I only count my 7% contribution?

Do contributions made to HSA's count in your savings rate? Or just retirement accounts? Currently I max out my HSA which translates to around 5.5% of my gross (not take home) pay. However, I haven't been counting that money in part because I expect to blow through all of it over the next two years - we plan to have another kid and I have complicated pregnancies. From my last one I learned to anticipate hitting the OOP max during the pregnancy year and also the year after delivery. So I don't know if I should be counting this money or not, this will likely be last pregnancy so expenses should stabilize after that.

Thank you for your insight.

I'm a red panda

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Re: Quick clarifying question on calculating savings rates
« Reply #1 on: January 10, 2018, 10:35:55 AM »
You need to decide how you do this, and then do it the same every year.

I calculate based on gross pay. 
Taxes are my number one expense each year.


Allowed to put employer contributions in your savings rate? Allowed by whom? 
Again, I do not, some people might.  If you do include them as savings, you are also going to want to include them as income.  Same thing with HSA- you have to decide what to do with it.

MDM

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Re: Quick clarifying question on calculating savings rates
« Reply #2 on: January 10, 2018, 11:00:05 AM »
Or one can completely ignore a savings rate calculation.  Instead, calculate/estimate whatever is actually desired.

In other words, the savings rate is usually an intermediate calculation so that one may calculate something else.  Just skip the savings rate and go straight to the something else.

If the savings rate itself is truly the goal, then as iowjes said, just do it however you want but keep the method the same from year to year.

Jrr85

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Re: Quick clarifying question on calculating savings rates
« Reply #3 on: January 10, 2018, 11:24:28 AM »
When figuring out what percentage of our income we're saving we are supposed to use take home pay - is it right that is gross pay minus taxes, but all other deductions added back in (dependent care FSA, health insurance, etc) regardless of whether the deductions are tax advantaged?

Are we allowed to include employer contribution to a 401k in our savings rate? For example, if I am contributing 7% and employer is contributing 8% (to answer anticipated comments, yes my employer contributes 8%, yes I am ramping the contributions up this year, yes I am contributing enough to get the full 8% match), do I count that as a savings rate of 15%? Or do I only count my 7% contribution?

Do contributions made to HSA's count in your savings rate? Or just retirement accounts? Currently I max out my HSA which translates to around 5.5% of my gross (not take home) pay. However, I haven't been counting that money in part because I expect to blow through all of it over the next two years - we plan to have another kid and I have complicated pregnancies. From my last one I learned to anticipate hitting the OOP max during the pregnancy year and also the year after delivery. So I don't know if I should be counting this money or not, this will likely be last pregnancy so expenses should stabilize after that.

Thank you for your insight.

It really depends on what you are trying to do.  If you are using it to compare to say MMM or JL Collin's charts on savings rates and time to retirement, you need to copy how they do it.  If you are looking to track your own progress, you just need to be consistent.  I would argue there are some ways that are inaccurate (for example, you can't include your employer match in the savings number and not in the denominator), but it's not going to derail you. 

My two cents on the other questions: 

Employer match in savings rate?  Already addressed above, but if you are going to include it in the numerator (your savings), also include it in the denominator (your income).  So a 7% contribution with an 8% match doesn't get you to a 15 percent savings rate.  It gets you to something like a 13.88% savings rate (if that's all the savings). 

HSA contributions in savings rate? -- Again, it's six of one, half a dozen of the other.  I would say that if you include it in your income but not your savings, when you get spend money eligible to be reimbursed from teh HSA, that spending shouldn't be included in your spending (nor should the reimbursement be included in your income, since it was already included when you saved it).  If you track it that way, you are basically treating your healthcare as somewhat of a levelized expense.  The benefit of that is that it will let you track the spending in your control, and not swing your savings rate wildly based on when you need healthcare.  Even though that has some benefits, I personally would rather go ahead and include it, since it utlimately can be used as a retirement account if you don't need the healthcare spending. 

charis

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Re: Quick clarifying question on calculating savings rates
« Reply #4 on: January 10, 2018, 11:32:18 AM »
We include take-home income and pre-tax contributions (including employer retirement match) as income.  As stated above, I don't think it really matters as long as you have a consistent comparison.

HSA savings is savings, IMO, even if you reimburse yourself for medical costs later on because those costs will factor into your savings rate at that time.  Savings rate is just a calculation based on what you've saved minus what you've spent for a specified period of time.


neo von retorch

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Re: Quick clarifying question on calculating savings rates
« Reply #5 on: January 10, 2018, 11:33:37 AM »
A lot of people look to calculating savings rates after reading The Shockingly Simple Math Behind Early Retirement.

The keys to that math are - actual ongoing annual expenses and actual amount added to your investments. Based on those, you can calculate how many years until you get to your target nest egg that lets you retire. How much you earn or where the money comes from isn't really as important.

If you earn $40k, get $10k in retirement/HSA matches, and spend $25k, you'll have an effective 50% savings rate, and (assuming you start with $0 investments and you invest everything you don't spend) 16 years of following the same pattern for your investments to grow to cover that $25k annual spend.

neil

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Re: Quick clarifying question on calculating savings rates
« Reply #6 on: January 10, 2018, 12:35:45 PM »
Saving rates are nice, but I am finding they are not only useful as a ballpark and there isn't much value in the calculus of a "perfect" definiton.  The article is great but also incredibly simplistic for a fluid world.

- When I attack the problem from the income side, more is always better.  But more income typically increases expenses (mostly taxes, but perhaps LCOL->HCOL also)
- When I attack the problem from the spending side, less is always better.  I define a budget that keeps me happy, and I try to stay on track.
- Sequence of returns affects time to FIRE significantly

Are taxes a cost?  Yes.  Should they be included?  I avoid them as best I can but the vast amount of it is not under my control.  So I don't.
Do pretax savings count?  They are a result of the physical time I spend to get that money, so I do.
Do interest/dividends count?  They aren't a result of my time, so I don't.  I also get penalized for these at tax time.  Effect is zeroed out if I ignore both.
What about rent vs home ownership without a mortgage?  It skews the data but your assets are tied into a non-productive asset.

Then I get a number that is in my spreadsheets that somewhat represents income realized from my time versus my personal expenses.  It's neat to have it there, but it is not my direct goal to make it the largest percentage and then do things explicitly to increase it.

newgirl

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Re: Quick clarifying question on calculating savings rates
« Reply #7 on: January 10, 2018, 12:38:41 PM »
Thanks everyone for sharing your thoughts. I did read that MMM article and thought that savings rate might be a nice short term metric for me since I am ramping up savings in 2018, but as I was totaling things up I realized I didn't have a really concrete idea of how to calculate it. Appreciate you guys chiming in with these different considerations/approaches.