Author Topic: Quick shockingly simple math question  (Read 1999 times)

EconDiva

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Quick shockingly simple math question
« on: February 09, 2018, 09:13:03 AM »
When you calculate your savings rate, do you include your 401k employer match in the amount that is saved?

I'm getting 5% of gross added into my 401k by my employer.  *I* don't "personally" save it, but it is a part of savings so I assumed so.  May seem like a silly question but I just realized I had actually never been counting this amount, which would actually bump up my savings rate by close to 7%.

GuitarStv

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Re: Quick shockingly simple math question
« Reply #1 on: February 09, 2018, 09:14:29 AM »
Yes.  Calculate net savings.  The money is there for your retirement, whether it passes through your personal accounts first or goes directly to savings makes no difference.

Gilly

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Re: Quick shockingly simple math question
« Reply #2 on: February 09, 2018, 09:16:11 AM »
I personally would add it on both sides of the equation, to your income and your savings I don't because I have a $100 match per year.

EconDiva

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Re: Quick shockingly simple math question
« Reply #3 on: February 09, 2018, 09:20:27 AM »
Yes.  Calculate net savings.  The money is there for your retirement, whether it passes through your personal accounts first or goes directly to savings makes no difference.

Makes sense.

In verifying the answer to this question I started pondering something else:  Which side is the most important side of the equation:  How much I'm spending...or how much I'm saving?  I assume based on what the article states, it's what I'm spending since it has this whole "double impact".  So although right now I'm at a good savings rate, I'm realizing my spending is actually still a bit too high which was important to make note of.  Just pondering a few random thoughts here.

EconDiva

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Re: Quick shockingly simple math question
« Reply #4 on: February 09, 2018, 09:22:59 AM »
I personally would add it on both sides of the equation, to your income and your savings I don't because I have a $100 match per year.

I thought it says to look at your savings as a % of your take home pay, and take home pay is gross pay minus taxes.  I'm not grossing that 5% match. 

Gilly

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Re: Quick shockingly simple math question
« Reply #5 on: February 09, 2018, 09:32:31 AM »
I personally would add it on both sides of the equation, to your income and your savings I don't because I have a $100 match per year.

I thought it says to look at your savings as a % of your take home pay, and take home pay is gross pay minus taxes.  I'm not grossing that 5% match. 
I don't technically take home my contributions to the 401k, but that counts towards my savings rate and take home pay. Do you see this money as different than that somehow? In my mind if money comes into my control (and I count a 401k as in my control) it is income. Taxes aren't income because it is not in my control.

dandarc

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Re: Quick shockingly simple math question
« Reply #6 on: February 09, 2018, 09:33:10 AM »
I personally would add it on both sides of the equation, to your income and your savings I don't because I have a $100 match per year.

I thought it says to look at your savings as a % of your take home pay, and take home pay is gross pay minus taxes.  I'm not grossing that 5% match.
If you're going to count the 5% match as savings, you either also add it to income, or the table / time to retirement computation will be overly optimistic.

If you're at say 50% without this match, then when you add it in, you have 2 options:

Count only in savings.  Savings rate is now 55% / 100% = 55%

Count in savings and income.  Savings rate is now 55% / 105% = 52%

Now, since we're only talking about 5%, that is not a huge difference, but what if your employer ups the ante and you're suddenly getting a 10% match.

60/100 = 60%

60/110 = 54%

Looking at the table in the article, that is a full 2 years different in the projected time to retirement.

Gilly

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Re: Quick shockingly simple math question
« Reply #7 on: February 09, 2018, 09:50:10 AM »
Another way to look at it is you are approaching retirement. You need (1- your savings rate)% of salary to live. Let's say you save 40% of your 100k income and your employer matches 5%. You would need 60k to live.
Under just adding your match to your savings the equations would say you need (1-.45)=55% or 55k to live, but wait you actually need 60k and are now 5k short.
But if you add that 5% to both sides you would be saving 45/105k or 42.xxx%. Now in calculating how much you need to live it would be (1-.42xx) or 57.xxx% of 105 which would give you 60k.
Edit: Salary and savings numbers chosen for pure laziness of computation.
« Last Edit: February 09, 2018, 09:52:25 AM by L. WereBear »

EconDiva

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Re: Quick shockingly simple math question
« Reply #8 on: February 09, 2018, 10:01:18 AM »
Another way to look at it is you are approaching retirement. You need (1- your savings rate)% of salary to live. Let's say you save 40% of your 100k income and your employer matches 5%. You would need 60k to live.
Under just adding your match to your savings the equations would say you need (1-.45)=55% or 55k to live, but wait you actually need 60k and are now 5k short.
But if you add that 5% to both sides you would be saving 45/105k or 42.xxx%. Now in calculating how much you need to live it would be (1-.42xx) or 57.xxx% of 105 which would give you 60k.
Edit: Salary and savings numbers chosen for pure laziness of computation.

Got it...everything makes sense.

Dicey

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Re: Quick shockingly simple math question
« Reply #9 on: February 09, 2018, 10:03:51 AM »
Since you said you're pondering, I think I'll toss in a couple of pennies here. I never counted my employer match, nor did I include the principal portion of my mortgage payment on a monthly basis. Somehow I managed to drag myself across the FIRE finish line anyway.  It is not necessary to include them. It's just fine if they hum along in the background.

When I do a net worth calculation, I see the results of these efforts just fine. I don't need to puff up my daily/weekly/monthly savings rate to stay motivated. Nor do I need to have bragging rights about my savings rate to myself or to anyone else. Besides, it's the number of dollars you accrue that let you FIRE. As an old boss of mine used to say, "Percentages don't buy groceries, dollars do."

Counting your 401k contributions, plus any additional savings/investments made out of net earnings, will still get you there in fine style.

Another important aspect that is less discussed is the power of compounding. The sooner you get dollars into investments, the faster you will reach your goals. This is why order of investment is equally important.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

Gilly

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Re: Quick shockingly simple math question
« Reply #10 on: February 09, 2018, 10:08:14 AM »

Got it...everything makes sense.
Glad to help.

EconDiva

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Re: Quick shockingly simple math question
« Reply #11 on: February 09, 2018, 10:09:52 AM »
Since you said you're pondering, I think I'll toss in a couple of pennies here. I never counted my employer match, nor did I include the principal portion of my mortgage payment on a monthly basis. Somehow I managed to drag myself across the FIRE finish line anyway.  It is not necessary to include them. It's just fine if they hum along in the background.

When I do a net worth calculation, I see the results of these efforts just fine. I don't need to puff up my daily/weekly/monthly savings rate to stay motivated. Nor do I need to have bragging rights about my savings rate to myself or to anyone else. Besides, it's the number of dollars you accrue that let you FIRE. As an old boss of mine used to say, "Percentages don't buy groceries, dollars do."

Counting your 401k contributions, plus any additional savings/investments made out of net earnings, will still get you there in fine style.

Another important aspect that is less discussed is the power of compounding. The sooner you get dollars into investments, the faster you will reach your goals. This is why order of investment is equally important.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

Hey!  This was a really helpful post for me...thank you! 

I needed to hear this today.  I've been getting very caught up in the %'s lately.  Am I at at least the 50% mark?  Can I get to 60%?  How soon?  Why I not there yet?  Etc., etc.

Although the savings rate itself is important, I agree that a perhaps more "big picture" evaluation of "will I hit the FI number needed within a timeframe reasonably for me" is just as valuable.

EconDiva

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Re: Quick shockingly simple math question
« Reply #12 on: February 09, 2018, 10:10:37 AM »

Got it...everything makes sense.
Glad to help.

Thank you!  (And the poster above as well!)