### Author Topic: Savings Rate of 50% .. does that include ..  (Read 11474 times)

#### LiseE

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##### Savings Rate of 50% .. does that include ..
« on: August 01, 2014, 01:38:59 PM »
I realize that the very nature of this question isn't mustachian but I wanted some input on this ..

Assuming the following: hubby's employer matches 100% up to 20% of his salary and my employer matches 50% up to 5% of my salary

Hubby Contributes 20% to 401K (with employer match this is effectively 40% of his income)
I Contribute 10% to my 401K (effectively 15%)

We are effectively saving 55% of our salary but really only contributing 30% of our income ..

When talking about savings rates, should you include your employer matching contributions?  I'm guessing the answer is no ??

#### Cromacster

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #1 on: August 01, 2014, 01:46:15 PM »
You can, but technically it should also be counted as income

And a 20% match!?  Sign me up, jeez.

#### shotgunwilly

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• Posts: 548
##### Re: Savings Rate of 50% .. does that include ..
« Reply #2 on: August 01, 2014, 01:47:02 PM »
I realize that the very nature of this question isn't mustachian but I wanted some input on this ..

Assuming the following: hubby's employer matches 100% up to 20% of his salary and my employer matches 50% up to 5% of my salary

Hubby Contributes 20% to 401K (with employer match this is effectively 40% of his income)
I Contribute 10% to my 401K (effectively 15%)

We are effectively saving 55% of our salary but really only contributing 30% of our income ..

When talking about savings rates, should you include your employer matching contributions?  I'm guessing the answer is no ??

Holy smokes! I need to get a job there.

Personally, I add my employers match to both my income and my savings and then calculate the rate.

#### Eric

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #3 on: August 01, 2014, 01:58:05 PM »
Was this question just an excuse to brag and make us all jealous?  :)

#### Angie55

• Guest
##### Re: Savings Rate of 50% .. does that include ..
« Reply #4 on: August 01, 2014, 02:04:27 PM »
I have been screwed out of my company match TWICE by employers laying off prior to the full vesting waiting period. If your plan has a required time with the company before you get the full amount I would not count it in your savings rate.

Also, I want to work where your husband does....

#### nereo

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #5 on: August 01, 2014, 02:58:09 PM »

When talking about savings rates, should you include your employer matching contributions?  I'm guessing the answer is no ??
I would say yes, because it is all part of your income.  So what if it "disappears" if you don't use it.  If your spouses' employer suddenly canceled that 401(k) plan you would find FI to be a bit further away because you wouldn't have as much to contribute each year towards retirement savings.

Ultimately though if you're too focused on your exact savings rate you can miss the forest for all the trees.

#### MooseOutFront

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #6 on: August 01, 2014, 03:40:11 PM »
I count mine, but also add it to the income side.  It only makes sense.  So stop cheating.

#### dandarc

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #7 on: August 01, 2014, 04:12:15 PM »
I realize that the very nature of this question isn't mustachian but I wanted some input on this ..

Assuming the following: hubby's employer matches 100% up to 20% of his salary and my employer matches 50% up to 5% of my salary

Hubby Contributes 20% to 401K (with employer match this is effectively 40% of his income)
I Contribute 10% to my 401K (effectively 15%)

We are effectively saving 55% of our salary but really only contributing 30% of our income ..

When talking about savings rates, should you include your employer matching contributions?  I'm guessing the answer is no ??

The math's a bit wonky here - if you both make the same amount of money, you're contributing (20% + 10%) / 2 = 15% of your money and getting (40% + 15%) / 2 = 27.5%.

If you're going to count the match as part of your savings rate, in order to not fall into a rose-colored glass trap, you must add it to both the numerator and denominator, so for this example where you both make the same amount of money, if you want to include the match as the savings rate, you've got:

(20% + 20% + 10% + 5%) / (100% + 20% + 100% + 5%) = (55%) / (225%) = 0.244444 or 24.44% savings rate from 401K.
« Last Edit: August 01, 2014, 04:15:29 PM by dandarc »

#### chasesfish

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #8 on: August 01, 2014, 07:24:23 PM »
Yes if it immediately vests

#### sol

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #9 on: August 01, 2014, 08:03:53 PM »
The math's a bit wonky here

Agreed.  40% of one salary plus 15% of another salary is not 55%.  If the two salaries were equal it would be 27.5%.

Think of it this way.  If my wife and I are each contributing 50% of our salaries, are we saving 100%?

#### dandarc

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #10 on: August 01, 2014, 08:42:52 PM »
The math's a bit wonky here

Agreed.  40% of one salary plus 15% of another salary is not 55%.  If the two salaries were equal it would be 27.5%.

Think of it this way.  If my wife and I are each contributing 50% of our salaries, are we saving 100%?

Would be pretty awesome if it worked that way.

#### iwasjustwondering

• Bristles
• Posts: 438
##### Re: Savings Rate of 50% .. does that include ..
« Reply #11 on: August 01, 2014, 08:55:12 PM »
I don't count the employer match.  I add up the \$ I have put into savings only.

#### Beric01

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #12 on: August 01, 2014, 08:58:58 PM »
I realize that the very nature of this question isn't mustachian but I wanted some input on this ..

Assuming the following: hubby's employer matches 100% up to 20% of his salary and my employer matches 50% up to 5% of my salary

Hubby Contributes 20% to 401K (with employer match this is effectively 40% of his income)
I Contribute 10% to my 401K (effectively 15%)

We are effectively saving 55% of our salary but really only contributing 30% of our income ..

When talking about savings rates, should you include your employer matching contributions?  I'm guessing the answer is no ??

Can you send over my resume to your husband's company? I'd like to apply immediately. I would even apply as a janitor. That is seriously an incredible match.

I count my match as both income and a savings percentage.

#### boarder42

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #13 on: August 01, 2014, 09:54:07 PM »
wow math

so assume you both make 50k ... you make 100k total .. he gets 20k including match ... you get 7.5k including match... but what you havent included is the income side of the equation... so you halve the match ( this is the easy way to get there)   so your husband is now at 15k b/c 10k was income and he saved it all.  youre at 6250  ... so you're effective rate is 21250 or 21.25%

#### LiseE

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #14 on: August 04, 2014, 08:10:35 AM »
If my hubby makes 100K and contributes 20K to his 401K which is matched 100% doesn't that = 40% of his salary going into 401K?  His effective rate of savings is 40% no?

#### luna

• Posts: 95
• Location: New York, NY, USA
##### Re: Savings Rate of 50% .. does that include ..
« Reply #15 on: August 04, 2014, 08:18:46 AM »
Not really.

His total compensation would be 120k, out of which 40k would go into the 401k.

That means his rate would be 40/120 which is approx 33%.

(Not counting that the max he can put in is 17.5k/year, so the total would be 37.5k or 35k depending on how the employer does the matching.)

#### sol

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #16 on: August 04, 2014, 08:28:22 AM »
If my hubby makes 100K and contributes 20K to his 401K which is matched 100% doesn't that = 40% of his salary going into 401K?  His effective rate of savings is 40% no?

You CAN count it that way, though I suspect most people here don't.  The problem in your original post was in then adding your % to his %, rather than averaging them based on the proportions of your salaries.

It really depends on why you're trying to figure you savings rate.  If it's to put yourself on the graph of years to retirement like MMM's "simple math" post, then your savings rate should be total savings divided by total (savings+spending).  Notice that your earnings don't appear in that ratio, as the (savings + spending) sort of ignores complications like taxes and amount from matches.

#### dandarc

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #17 on: August 04, 2014, 12:44:51 PM »
Yeah, and we aren't trying to be jerks about the math here - it is just that the difference is significant enough that you could have some VERY unrealistic expectations based on the numbers.  Difference between 55% and 25% on Mr Money Mustache's chart is 14.5 years vs 32 - don't want you to expect your plan will have you retired in 14 years when in reality it is more than double that.

#### MooseOutFront

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #18 on: August 04, 2014, 12:46:21 PM »
If my hubby makes 100K and contributes 20K to his 401K which is matched 100% doesn't that = 40% of his salary going into 401K?  His effective rate of savings is 40% no?
I used to do the math like that back when I wanted to hit the 15% threshold for Baby Step 5 with as minimal pain possible. :)  It's cheating.  That match is both income and savings, not just savings.

#### skunkfunk

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #19 on: August 04, 2014, 12:48:24 PM »
As far as calculating your time to retirement, keep in mind that these numbers are pretax and that you should base FI time on expenses, not income. If you save 50% of your "take-home" pay post-tax, that's what 20 years to retirement? Pre-tax, it's a little bit longer.

#### dandarc

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #20 on: August 04, 2014, 01:36:21 PM »
Depends on how much frugality plays into it - you control your tax rate a lot more in retirement.  If you spend 20k per year or less (Married filing jointly), and you structure your withdraws properly, you will be paying 0% in income taxes (federal any way).  And you can pay little to no taxes when you are in the draw-down phase on significantly more spending than that as well - that's currently just the "obvious" amount you can get tax free with the standard deduction and two exemptions.

That right there is the beauty of the traditional IRA / 401K - when you're saving, you're saving your marginal tax rate which for most people is at least 10%, and can be as high as 39.6%.  If you go the "no-other-income" route in retirement, you're paying your effective tax rate - and on presumably a lot less income than you were earning before retirement - all of that tax free space, and zero taxes on capital gains / dividends work to make your tax bill in retirement very low, if you do it right.

#### skunkfunk

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #21 on: August 04, 2014, 01:38:28 PM »
Depends on how much frugality plays into it - you control your tax rate a lot more in retirement.  If you spend 20k per year or less (Married filing jointly), and you structure your withdraws properly, you will be paying 0% in income taxes (federal any way).  And you can pay little to no taxes when you are in the draw-down phase on significantly more spending than that as well - that's currently just the "obvious" amount you can get tax free with the standard deduction and two exemptions.

That right there is the beauty of the traditional IRA / 401K - when you're saving, you're saving your marginal tax rate which for most people is at least 10%, and can be as high as 39.6%.  If you go the "no-other-income" route in retirement, you're paying your effective tax rate - and on presumably a lot less income than you were earning before retirement - all of that tax free space, and zero taxes on capital gains / dividends work to make your tax bill in retirement very low, if you do it right.

OP is saving 40K out of 120K. Kinda doubt they'll get that spending anywhere near low enough for such shenanigans.

#### dandarc

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #22 on: August 04, 2014, 01:55:07 PM »
Right, but their effective tax rate could still be quite a lot less in retirement than the marginal rate is today.

#### Mrs. Frugalwoods

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #23 on: August 04, 2014, 02:24:52 PM »
I think everyone approaches this slightly differently; FWIW, we do the following:

Our annual % saved = cash saved after taxes, after both maxing out our 401Ks

In other words, we calculate our savings percentage by the following equation: monthly after-tax savings / take-home pay

#### LiseE

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##### Re: Savings Rate of 50% .. does that include ..
« Reply #24 on: August 05, 2014, 08:53:03 AM »
Thanks everybody .. as I originally stated, I knew I wasn't calculating it the correct 'mustacian' way and your feedback has been really helpful to understand so much more regarding how our savings rate effects our retirement planning.  I'm going to re-read through all the responses to get a better understanding on it ..