Author Topic: Calculating Savings Rate  (Read 2410 times)

tonycar17

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Calculating Savings Rate
« on: January 24, 2016, 08:08:10 PM »
Hey all, been lurking for awhile, and this is my first post.  I tried to use the search feature, but I keep getting a database error when I do my search.  I am wondering if I am calculating my savings rate correctly - here is how I am calculating:

Gross Pay - Taxes - Deductions (health / dental / vision) I am calculating as the denominator in my savings calculation.

In the numerator of our total savings, I have our 401K contributions, HSA Contributions, EESP purchase amount, 529 Savings, and taxable savings. 

Here is practically what it looks like in a given pay period:

Gross Pay:  $8019.36
Taxes:  $1964.76
401K:  $1202.90
HSA:  $235.99
ESPP:  $133.85
Insurance:  $336.86
Paycheck deduction for donations (United Way):  $23.84
Taxable Savings:  $500
529:  $350
Dependent Care Deduction:  $57.69

After I make adjustments for taxes and insurance deductions, I come up with a denominator of the savings rate calculation of $5717.74 and a total savings per pay period of $2422.74 - for a savings rate of 42.37%.  If I add the employer match of $467.61 per paycheck, it raises the savings rate to 50.55%.

Does this seem right?

Now, we both end up hitting the max for 401K contribution as we have bonuses paid out in March.  We also have, I feel, an additional $800-1000 that we can add to our savings rate, getting us up around 60%.  I will post a full budget at some point in the next month or two, but we are actively working to trim things now. 

Side question.....we have about $200K in retirement funds now and an additional $80K in taxable - I am hoping to FIRE by the time I turn 50 in 10 years.....does this seem doable at our current savings rate?

Sorry I am all over the place!

TC


MDM

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Re: Calculating Savings Rate
« Reply #1 on: January 24, 2016, 08:58:42 PM »
I leave it to others to discuss the finer points of "savings rates".

Personally, I'd ignore savings rate completely and look at Networthify or the equivalent "Time to FI" calculation in the 'Misc. calcs' tab of the case study spreadsheet.

Try putting       calculate savings rate site:forum.mrmoneymustache.com     into google and see what you get.... :)

arebelspy

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Re: Calculating Savings Rate
« Reply #2 on: January 25, 2016, 01:00:57 AM »
Hey all, been lurking for awhile, and this is my first post.  I tried to use the search feature, but I keep getting a database error when I do my search.

You are trying to search all subforums at once. Choose one or two.  Or use google, with the operator "site:forum.mrmoneymustache.com"

Here you go:
http://www.google.com/search?hl=en&source=hp&q=site%3Amrmoneymustache.com%2Fforum+calculate+savings+rate
http://forum.mrmoneymustache.com/ask-a-mustachian/calculating-savings-rate/
http://forum.mrmoneymustache.com/ask-a-mustachian/calculating-my-savings-percentage/


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Retire-Canada

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Re: Calculating Savings Rate
« Reply #3 on: January 25, 2016, 06:39:21 AM »
Side question.....we have about $200K in retirement funds now and an additional $80K in taxable - I am hoping to FIRE by the time I turn 50 in 10 years.....does this seem doable at our current savings rate?

Hey TC I'll just tackle this ^^ question. [I didn't verify your savings rates]

Based on the gross salary and savings rate you posted you need $4619/month or $55.4K/yr to live incl taxes.

That's 25 x $55.4K = ~$1.4M saved and invested.

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

Starting from zero getting there would take you ~20yrs. The fact you've got $280K saved and you get an employer match means you are not going to take that long.

A simple way to look at this is:

- saving ~50% with employer match = $36K/yr added
- starting $280K
- 10yr timeframe
- compound interest calculator test for 5% =$932K total
- compound interest calculator test for 7% = $1.1M total

Keeping mind:

- this assumes you need the same amount in FIRE as now
- this assumes your taxes scale down when they will probably be lower
- this assumes constant rates of returns which will never happen
- does not factor in Gov't retirement benefits
- this assumes a constant WR and no income during retirement

You can fine tune your simple calc by looking at each variable and putting in your best guess if you come up with a different number than I did.

You can also run a simulation at http://www.cfiresim.com/ where you can play with different savings rates and WR scenarios to see what the impact is.

Just based on what this ^^^ you are in the ballpark to hit your goal. If you can bump your savings rate up that will really help because it not only means you will save more quickly, but the target you are heading for is coming down. If you have a side gig idea for FIRE that could earn a bit of income and/or you can work with a variable WR you can also reduce your FIRE prep time needed.
« Last Edit: January 25, 2016, 06:42:30 AM by Retire-Canada »

nereo

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Re: Calculating Savings Rate
« Reply #4 on: January 25, 2016, 07:10:41 AM »
Hey all, been lurking for awhile, and this is my first post.  I tried to use the search feature, but I keep getting a database error when I do my search.  I am wondering if I am calculating my savings rate correctly - here is how I am calculating:


Other have commented on the finer points, so I'll just say the thing I always say when people ask if their method for calculating their savings rate is correct:  Don't miss the forest for all the trees.

In other words, worrying about the exact savings % is ("the trees") is a bit silly.  Calculating your savings rate is just meant to be a rough financial check.  What really matters is the total amount you save in absolute dollar terms and the total amount you plan to spend in ER ("the forest").

 For most people, this is a savings of ~25x retirement spending, with the exact amount depending on whether you want to be more conservative or more flexible/liberal.

I agree with Retire-Canada here; you seem to be in the ballpark of retiring in 10 years.  The more you can save the more likely you will hit this target.

FrugalFan

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Re: Calculating Savings Rate
« Reply #5 on: January 25, 2016, 07:24:38 AM »
I will just add a couple of things. If you are focusing specifically on the simple math post that retire-canada linked to above, and you want to use your % savings rate to see how long it should take you to reach retirement, there are a couple of things to keep in mind. For your savings rate, if you add a extra number to the numerator (like your 401k match), you also have to add it to the denominator, which brings your savings rate to more like 46%. And while all the things you list are "savings", only some of them will contribute your personal stash that you hope to retire on (i.e., I would not count 529 contributions in this). On the other hand, your expenses may be lower in retirement when you are not supporting kids and saving for their education (this is definitely true for us). And you definitely should count your current stash, which the simple math post does not take into account. That's why the 25X expenses calculation that nereo points to is so much simpler. You can also check out http://www.cfiresim.com/ which allows you to take all those things into account.

tonycar17

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Re: Calculating Savings Rate
« Reply #6 on: January 25, 2016, 10:48:59 AM »
Thanks all for the responses, definitely some good stuff.  I am going to take a look at the links provided as well as cfiresim.  Will post a full case study for detailed feedback sometime soon as there are things that I KNOW we can do to increase momentum and then other things that I may not see inherently where all of you and your experience will be hugely beneficial.

I also can really appreciate the forest through the trees commentary - going through some of these additional exercises in the coming weeks and months will help to ensure we concentrate on the forest!

Thanks again!

TC