What's your view on using 25% of pre-tax vs. after-tax? Also curious but is your current effective saving rate? I imagine it's actually higher than 25%.
After-tax is always the better number. It is what you actually have to use.
It gets tricky with trad IRA and trad 401k since it is a pre-tax contribution and you have no idea what your future tax rate is. You can use your current tax rate or a proxy (30% tax?) and try to guess at an approximate after-tax savings rate for those contributions.
Personally, we try to diversify our taxes by using the roth IRA and Roth 401k. Currently we are about 50% Roth, 30% Trad, and 20% taxable brokerage (ignoring HSA contributions).
Also, we personally just add up the contributions...So a 10% trad contribution and 10% Roth = 20% savings rate...We try to not overcomplicate it. We have increased our savings rate every year and are well north of 35% so even with a conservative estimate (high future tax rate) we should be over 25%.
Good post. I feel lucky to be able to save/invest 88% of my post-tax income (I only spend a hundred or so dollars a month on wants)
Is the average person really so lazy they can't bring down 30% wants to like 5% and then save roughly 45% of their post tax income on investments? Just astounded that the bar is so low.
That makes sense. I may need to re-think my perspective then. It's sometimes hard for me to understand how other people act on account of me being quite inexperienced and being extremely lucky to have unusual advantages that most people don't have.
I deeply appreciate your wisdom and expertise. Always love reading your posts
Other people try living on a $200k salary while making $50k and it means no room for saving. We know people who save 0%, even forgoing 401k matches, but are out with the newest phones, new tesla, designer clothes, etc.
In the words of BTB, "assume people are trying their best, and then you feel pity for them like a [redacted] puppy"...We are trying to share advice and help get people up to speed. But can only do so much.
It is a proxy for real return across a diversified portfolio.
You can pick and choose a number that you think reflects the next 40 years.
We have our doubts that the next 40 years of real returns will be as good as the last 40 years.
1) Bond bull market is turning into a rising rate environment
2) Equity markets are potentially frothy
3) Inflation is ripping again
4) Manufacturing has been leaving the country
5) Current demographics are skewing older meaning portfolio drawdowns vs asset accumulation
So in short, it is a more conservative view vs the 7% returns shown above.
We would rather caution people to oversave and have a bunch of 45 year old multi-millionaires who saved too much vs echo all the rosy assumptions that psyop people that saving $500 a month for 40 years will allow you to retire to your dream retirement.
Thanks for your reply. I feel humans are just too overcautious. Look at what happened the last 100 years and the returns. We always think the future might not be as good. Who would have predicted these returns from 2010-2020 after GFC?
I'd consider myself FI and fully agree what people save and invest is a joke. However, the most important resource is time if we like it or not. I'd rather have a bit less money in my 60-70s and live now. No one will be a multi millionaire by 45 by following this but at the same time again I'd rather not be a multi millionaire at 65 but experience more things now while I am "young". That doesn't mean I plan to be broke in my retirement.
Did you check the book Die with zero. Resonated with me quite a bit. It's always a balance of course.
Agree we set our savings based on conservative assumptions. The way we view saving - we'd rather plan on low returns and save more money due to being safe than the opposite.
Worse case, we have more money than expected if real returns keep up with historical pace.
we want to 'die with zero' because we transferred generational wealth to an irrevocable trust for kids and grandkids. Not 'die with zero' while eating cat food because you ran out of money 5 years ago.
But personal finance is personal. We think saving 25% is a good starting point for most people since most people aren't even close to saving that much.
Yep fully agree. If people would save 25% that would be life changing for society but I think we both know that’s never gonna happen!:)
On the other side look at savings retirees have. I’m shocked how little it is but humans adapt to whatever relativity quickly as the current inflation shows. I’m sure people would say no way I can save an extra 10% but I’m assuming most people don’t go hungry right now.
So being in a position at a young age having 20x of my living expenses invested, I start to chill and enjoy life more. So far 3 international trips and more to come!
Social Security helps. Long-term Care insurance used to be super profitable. Pensions. Home value increases. There is a lot of tailwinds that may or may not be there in the future "you'll own nothing and be happy" society. But overall agree - you can be 85, sit and watch news all day, eat ham on white bread sandwichs and survive on very little income like old people are today.
Bravo - Seems like you did it right in your youth. That is an ideal place to be and definitely explains your perspective. If you are well pass your financial freedom number and want to coast and enjoy it. We don't blame you.
What's your view on using 25% of pre-tax vs. after-tax? Also curious but is your current effective saving rate? I imagine it's actually higher than 25%.
Good Q.
After-tax is always the better number. It is what you actually have to use.
It gets tricky with trad IRA and trad 401k since it is a pre-tax contribution and you have no idea what your future tax rate is. You can use your current tax rate or a proxy (30% tax?) and try to guess at an approximate after-tax savings rate for those contributions.
Personally, we try to diversify our taxes by using the roth IRA and Roth 401k. Currently we are about 50% Roth, 30% Trad, and 20% taxable brokerage (ignoring HSA contributions).
Also, we personally just add up the contributions...So a 10% trad contribution and 10% Roth = 20% savings rate...We try to not overcomplicate it. We have increased our savings rate every year and are well north of 35% so even with a conservative estimate (high future tax rate) we should be over 25%.
Long-term our goal is to hit 50%+ savings.
Good post. I feel lucky to be able to save/invest 88% of my post-tax income (I only spend a hundred or so dollars a month on wants)
Is the average person really so lazy they can't bring down 30% wants to like 5% and then save roughly 45% of their post tax income on investments? Just astounded that the bar is so low.
A lot of people have:
1) Too much house (should be <25% of your AT income)
2) Too fancy cars (should be <5% of your AT income)
3) Student Loans (should be 0 or close to it)
4) No concept of money squandered
They get overextended to get the life they 'deserve' (their words). And they don't have careers/jobs that allow for rapid income growth.
When you have lots of high fixed costs you don't have much room to increase savings.
Keep it up though man. 88% is "Financial Freedom in a hurry" level
That makes sense. I may need to re-think my perspective then. It's sometimes hard for me to understand how other people act on account of me being quite inexperienced and being extremely lucky to have unusual advantages that most people don't have.
I deeply appreciate your wisdom and expertise. Always love reading your posts
I think your standard for yourself is spot on.
Other people try living on a $200k salary while making $50k and it means no room for saving. We know people who save 0%, even forgoing 401k matches, but are out with the newest phones, new tesla, designer clothes, etc.
In the words of BTB, "assume people are trying their best, and then you feel pity for them like a [redacted] puppy"...We are trying to share advice and help get people up to speed. But can only do so much.
All in for saving more but wonder why your return % is just 3% after inflation.
Isn’t it historically closer to 7% after inflation?
Good question.
It is a proxy for real return across a diversified portfolio.
You can pick and choose a number that you think reflects the next 40 years.
We have our doubts that the next 40 years of real returns will be as good as the last 40 years.
1) Bond bull market is turning into a rising rate environment
2) Equity markets are potentially frothy
3) Inflation is ripping again
4) Manufacturing has been leaving the country
5) Current demographics are skewing older meaning portfolio drawdowns vs asset accumulation
So in short, it is a more conservative view vs the 7% returns shown above.
We would rather caution people to oversave and have a bunch of 45 year old multi-millionaires who saved too much vs echo all the rosy assumptions that psyop people that saving $500 a month for 40 years will allow you to retire to your dream retirement.
Thanks for your reply. I feel humans are just too overcautious. Look at what happened the last 100 years and the returns. We always think the future might not be as good. Who would have predicted these returns from 2010-2020 after GFC?
I'd consider myself FI and fully agree what people save and invest is a joke. However, the most important resource is time if we like it or not. I'd rather have a bit less money in my 60-70s and live now. No one will be a multi millionaire by 45 by following this but at the same time again I'd rather not be a multi millionaire at 65 but experience more things now while I am "young". That doesn't mean I plan to be broke in my retirement.
Did you check the book Die with zero. Resonated with me quite a bit. It's always a balance of course.
Agree we set our savings based on conservative assumptions. The way we view saving - we'd rather plan on low returns and save more money due to being safe than the opposite.
Worse case, we have more money than expected if real returns keep up with historical pace.
we want to 'die with zero' because we transferred generational wealth to an irrevocable trust for kids and grandkids. Not 'die with zero' while eating cat food because you ran out of money 5 years ago.
But personal finance is personal. We think saving 25% is a good starting point for most people since most people aren't even close to saving that much.
Yep fully agree. If people would save 25% that would be life changing for society but I think we both know that’s never gonna happen!:)
On the other side look at savings retirees have. I’m shocked how little it is but humans adapt to whatever relativity quickly as the current inflation shows. I’m sure people would say no way I can save an extra 10% but I’m assuming most people don’t go hungry right now.
So being in a position at a young age having 20x of my living expenses invested, I start to chill and enjoy life more. So far 3 international trips and more to come!
Compounding should do the heavy lifting now:)
Yes.
Social Security helps. Long-term Care insurance used to be super profitable. Pensions. Home value increases. There is a lot of tailwinds that may or may not be there in the future "you'll own nothing and be happy" society. But overall agree - you can be 85, sit and watch news all day, eat ham on white bread sandwichs and survive on very little income like old people are today.
Bravo - Seems like you did it right in your youth. That is an ideal place to be and definitely explains your perspective. If you are well pass your financial freedom number and want to coast and enjoy it. We don't blame you.