Metaphysical question on meaning of "savings"

[Nutria]

Hi,

Obviously, we save when we spend (and by that, I also mean "debt retirement") less than we earn. The left-over money goes into a "savings" account.

There's also that vacation you're accumulating for, a 20% down payment for a home, the new car, 401(k)/403(b)/IRA, HSA, 529, Dependent Childcare saving, etc, etc, etc.

But most all of that non-retirement savings is going to get spent much sooner rather than later on medical bills, home repair, auto repair, the new house, etc.

So, how do you calculate your savings rate? "Just retirement", or some other money too?

[disneysteve]

So, how do you calculate your savings rate? "Just retirement", or some other money too?

A common rule of thumb is to save 15% of your income for retirement and 5% for other purposes for a total savings rate of 20%. It is that other 5% that goes toward things like getting your next car, taking vacation, renovating your home, etc.

Personally, I think 20% is too low but if everyone was at least doing that, they'd be in far better shape.

[Nutria]

A common rule of thumb is to save 15% of your income for retirement and 5% for other purposes.

By the way you toss out generic rules of thumb and experts' opinions, I get the distinct impression that you don't have children or own a home.

[Joan.of.the.Arch]

I don't think that knowing and abiding by a rule of thumb like 20% of income to saving means that one likely doesn't have kids or own a home. My spouse and I are now into the retirement phase --a little bit early-- but we did save about 30% of income, own a house and raised a child.

Original question: I calculated savings rate based on what was contributed to pension, to 403B, to independent retirement accounts, to medium term saving like for car or new roof, to long term saving. Didn't really count short term saving--such as for new small kitchen appliance or prom tuxedo rental. Those things just come out of daily expenses without a predetermined budget. (We've never been big into budgeting, but big into careful spending.)

[sblatner]

Actually DisneySteve has a daughter in college and does own a home. You should look up his posts. He gives great advice.

[Nutria]

I don't think that knowing and abiding by a rule of thumb like 20% of income to saving means that one likely doesn't have kids or own a home. My spouse and I are now into the retirement phase --a little bit early-- but we did save about 30% of income, own a house and raised a child.

The main problem is that his rule of thumb did not answer my original question: what is "saving"?

[feh]

By the way you toss out generic rules of thumb and experts' opinions, I get the distinct impression that you don't have children or own a home.

We own a home and have a child and have always saved well above 20%.

To answer your original question - if I had to provide a formula for savings rate, I'd say net income minus spending. However, savings rate and percentage set aside for retirement are not the same thing; I'd calculate the retirement savings rate separately.

[Nutria]

We own a home and have a child and have always saved well above 20%.

To answer your original question - if I had to provide a formula for savings rate, I'd say net income minus spending. However, savings rate and percentage set aside for retirement are not the same thing; I'd calculate the retirement savings rate separately.

That's the kind of opinion I wanted to know. We save in aggregate 27.4% of net income (43% if you include saving for next year's tuitions), but most of it moves out the door less than a year later. Just 6% goes to 401(k).

[feh]

That's the kind of opinion I wanted to know. We save in aggregate 27.4% of net income (43% if you include saving for next year's tuitions), but most of it moves out the door less than a year later. Just 6% goes to 401(k).

When folks talk about 15-20% savings rate, they are referring to retirement savings.

[disneysteve]

By the way you toss out generic rules of thumb and experts' opinions, I get the distinct impression that you don't have children or own a home.

As already noted, I am married, have a 19-year-old daughter who is a freshman in college, and we've owned our home since 1994.

The main problem is that his rule of thumb did not answer my original question: what is "saving"?

Sorry. I thought I did answer that. If you save 20%, 15% should be for retirement and the other 5% should be for other needs like the things you mentioned: "vacation you're accumulating for, a 20% down payment for a home, the new car, 401(k)/403(b)/IRA, HSA, 529, Dependent Childcare saving, etc,"

If you were doing that, you would have a savings rate of 20%.

If that didn't answer your question than I'm not really clear on what you're asking.

[disneysteve]

That's the kind of opinion I wanted to know. We save in aggregate 27.4% of net income (43% if you include saving for next year's tuitions), but most of it moves out the door less than a year later. Just 6% goes to 401(k).

Understood. We save about 25% of our income.

So you are saving a very nice percentage of income but I would suggest that you devote more toward retirement and less toward other things. 6% to retirement is not going to allow you to accumulate a large enough nest egg to retire comfortably (if at all).

[Nutria]

Understood. We save about 25% of our income.

So you are saving a very nice percentage of income but I would suggest that you devote more toward retirement and less toward other things. 6% to retirement is not going to allow you to accumulate a large enough nest egg to retire comfortably (if at all).

We aren't pissing away that 27% on trips to the casino or mani-pedis. Honest!

[phantom]

I don't calculate a savings rate unless someone asks me what my savings rate is. Then I ask the asker if they want a percent of net or gross and if they wanted to know just my retirement savings or my short/mid-term savings too.

We save about 20% of gross for retirement and about 37% of net counting retirement and everything else. Most of our non-retirement savings does tend to disappear right out the door within a couple of years. Sometimes it goes to things like new cars, fancy vacations, and home improvements; sometimes we just throw a chunk of it at the mortgage.

[disneysteve]

We aren't pissing away that 27% on trips to the casino or mani-pedis. Honest!

I didn't suggest that you were. The fact that you are saving that much is fantastic. But if only 6% is being put away for retirement and the rest is being saved for other things and will be spent before retirement, you might find you end up with not enough money to retire as planned. There are lots of online calculators that you can use to run the numbers. Of course, you also need to factor in things like a pension, social security, and any other expected sources of revenue (like real estate for example).

[Nutria]

I didn't suggest that you were. The fact that you are saving that much is fantastic. But if only 6% is being put away for retirement and the rest is being saved for other things and will be spent before retirement, you might find you end up with not enough money to retire as planned.

Ensuring that we retire with enough money is about 8th on our priority list, after multiple home repairs, auto repair, auto insurance for a teen boy, (used) car for the kids, help with college tuition, etc, etc.

Fortunately, all is not lost, since we have no CC debt, and $27K combined mortgage and auto balances, plus combined retirement balances above $360K.