Definition of % saved for retirement

[BuckyBadger]

What is the standard nomenclature for retirement savings percentage? Is it just the total dollar value saved over your total take home pay? That seems a little strange 'since the savings that I'm counting includes contributions that come out of my paycheck, thereby reducing take home pay. It makes the bottom of the equation dependent on the top of the equation, which is counter-intuitive to me...

So we save $69,000 a year in our 401ks, our IRAs, and regular investments. (This does not include employer match.) We make $230,000 gross. After everything is taken out, our actual paychecks add up to about $135,000 a year.

So are we saving 51%, or 30%?

[disneysteve]

What is the standard nomenclature for retirement savings percentage?

The recommendation is to save at least 15% of your gross annual income (not counting company match).

If you earn $230,000 and you save $69,000, you are saving 30% which is excellent.

[kork13]

What is the standard nomenclature for retirement savings percentage? Is it just the total dollar value saved over your total take home pay? That seems a little strange 'since the savings that I'm counting includes contributions that come out of my paycheck, thereby reducing take home pay. It makes the bottom of the equation dependent on the top of the equation, which is counter-intuitive to me...

That's why (IMO) it's easier to use gross pay for everything. If I wanted to, I could increase or decrease my "take home pay" significantly, just based on what I have taken out before it hits my bank account. So using gross income just makes it simpler.

[bennkar]

I've always felt you should include the principle portion of mortgage payments to your home as an investment, assuming that is you can sell it for at least as much as you paid for it. Thankfully I bought at the beginning of the home price run up so that is not a concern for me. By including the principle portions of my home payments, the past few years I could get into the 55-60% range (they combined for over $40k/yr. on a $80k salary). With my home paid for last month, who knows how high I can get my savings go next year.

[kork13]

I've always felt you should include the principle portion of mortgage payments to your home as an investment, assuming that is you can sell it for at least as much as you paid for it. Thankfully I bought at the beginning of the home price run up so that is not a concern for me. By including the principle portions of my home payments, the past few years I could get into the 55-60% range (they combined for over $40k/yr. on a $80k salary). With my home paid for last month, who knows how high I can get my savings go next year.

I don't know if I agree with you.... Do you also consider the principle portion of a car payment or student loan to be an "investment" as well? I can see the logic of considering an extra principle payment on a loan to be an investment, but not simply the principle portion of the regular debt payment. Perhaps just my perspective though...

[disneysteve]

I've always felt you should include the principle portion of mortgage payments to your home as an investment

I can see the logic of considering an extra principle payment on a loan to be an investment, but not simply the principle portion of the regular debt payment.

I need to boost my savings rate. I know what I'll do. I'll buy a house because then I can count my monthly payment toward my savings rate.

Doesn't really make sense when you pose it that way, does it?

No, your monthly payment is not an investment. I agree with kork that extra payments are savings.

Another issue is that I do not consider our house to be an investment. We aren't planning to sell it when we need money. It doesn't generate any income that we can use to live on. It is an asset and hopefully an appreciating one but it is not an investment.

[LivingAlmostLarge]

I do gross as well. We bring home I believe $5k/month to live on but we make more than double that, probably 1.5x. The rest is savings and taxes. I don't do net because I don't look at net and budget. I budget off gross and work from there.

More people need to look at budgeting big picture. Look at gross, annual, etc. Not just monthly payments and stuff. Because when you do net I've found people put retirement last, not first. If you put it first off of gross, then everything else needs to work from there.

[bennkar]

I need to boost my savings rate. I know what I'll do. I'll buy a house because then I can count my monthly payment toward my savings rate.

Doesn't really make sense when you pose it that way, does it?

No, your monthly payment is not an investment. I agree with kork that extra payments are savings.

Another issue is that I do not consider our house to be an investment. We aren't planning to sell it when we need money. It doesn't generate any income that we can use to live on. It is an asset and hopefully an appreciating one but it is not an investment.

I understand where you're coming from, but I was making a couple of assumptions that may not have been obvious. 1) You've already bought a house with a mortgage, so in a way its a sunk cost at this point, 2) The house is not a depreciating asset, and 3) You have no intention of walking away from the house in the future (i.e. default). You can debate if those are valid assumptions, but I'm using them as a starting point.

Given I already had bought my house (a sunk cost), even without extra principal payments, every payment was lowering the amount I had to pay to others in interest charges. So I am getting a set rate of return (my mortgage's interest rate) on *all* my principal payment, not just the extra amount. How is that different than saving in a bank (other than liquidity issues)?

And while I agree buying a less expensive house is usually better financially, if you did buy the more expensive house using my above assumptions, and your friend bought a less expensive house, when you both sell your fully paid off houses and move into a retirement community, you should be getting more $$$$ in house values than your friend (The difference in home prices). So at that point you *did* save more, in a manner of speaking. And the only way to save more is to either have a higher rate of return, or have a higher saving rate (which was the case here).

So I am not saying having a mortgage is the best way to "save", but for some people it *IS* a way to save, so I think its valid to include that as part of your savings rate (YMMV). And I suspect when its time to go to that retirement community, I will be pocketing more money selling my house than my friends that still have unpaid mortgages or just rented .

[krantcents]

My understanding is it would be savings as a percentage of your gross earnings. In your case it would be 30%.

[mcfroggin]

I need to boost my savings rate. I know what I'll do. I'll buy a house because then I can count my monthly payment toward my savings rate.

Doesn't really make sense when you pose it that way, does it?

No, your monthly payment is not an investment. I agree with kork that extra payments are savings.

Another issue is that I do not consider our house to be an investment. We aren't planning to sell it when we need money. It doesn't generate any income that we can use to live on. It is an asset and hopefully an appreciating one but it is not an investment.

+1