Author Topic: Calculating Savings Rate and other questions  (Read 1960 times)

r3d3mption

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Calculating Savings Rate and other questions
« on: October 13, 2015, 10:03:45 AM »
I'm currently saving/investing all of my money through pre-tax employer provided accounts: a 457b, 401k, and pension plan. I'm also saving in a Traditional IRA. I'll be vested in the pension plan in two years.

My question is this: I'm saving 18,000 in the 457b, 5500 in the 401k, 5300 in the pension plan annually. The IRA gets 4,400 per year. These total about 33,200 per year, which is more than my post-tax take home pay annually, which is 28,300. What is my savings rate? How should I calculate it? As it stands, it seems that I'm saving more than 100% of my living costs per year, but I'm nowhere near being able to stop working.

My actual expenses are currently 13300 per year, but I'm paying extra to my mortgage and student loans... the only debt I have remaining. If I also saved that extra income, maxing out the IRA and then putting it into a taxable account, That would be another 9600 per year, bringing my total savings per year to 42800 total. That, on paper, is 3.2 times my annual expenses.

I know I'm not accounting for healthcare, life insurance, dental... those kind of benefits that are pre-tax and shared with my employer.

Is the way I'm investing now (trying to reduce tax liability NOW, rather than later where I'll likely be in a lower tax bracket) a good idea? Should I be throwing more money at my debts?

What else should I be doing?

KCM5

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Re: Calculating Savings Rate and other questions
« Reply #1 on: October 13, 2015, 10:30:17 AM »
Your savings rate is you savings and debt principle divided by your living expenses, savings rate, and debt principle.


JustGettingStarted1980

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Re: Calculating Savings Rate and other questions
« Reply #2 on: October 13, 2015, 11:30:41 AM »
Calculate your savings rate per your gross pay, not your take home. This will be more relevant to you. I also personally remove all investment gains/losses from this gross savings rate calculation so that I can use this number for its purpose >>> helping me optimize my savings.

MDM

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Re: Calculating Savings Rate and other questions
« Reply #3 on: October 13, 2015, 08:00:14 PM »
What is my savings rate? How should I calculate it?
Whatever you want it to be, and however you want to calculate it.  The critical question is "why do you want to calculate it?"  If the answer is "to determine time to FI," consider using
    Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i). 
Details can be found in http://forum.mrmoneymustache.com/ask-a-mustachian/fire-in-8-years/

Quote
Is the way I'm investing now (trying to reduce tax liability NOW, rather than later where I'll likely be in a lower tax bracket) a good idea?
Yes, given the assumption of a lower marginal tax rate during withdrawal.

Quote
Should I be throwing more money at my debts?
Probably not, unless the interest rate on the debt is very high.

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for some thoughts on "how high is too high?"