Calculating total retirement contributions

[RobertD]

When people talk about putting away 10, 15, 20.. percent of their total income into retirement - I'm getting confused calculating my own.

I make with bonus about $96k a year, with take home around 66k after taxes & 401k paid. I have 6% of my income routed to my company sponsored 401k to get the match (effectively matching 5%). I also am contributing the max $5500 to a Roth IRA.

To calculate 'my total percentage of income to retirement' I get that I add the 401k & match contributions to get 11%, but I am essentially taking $5500/$66000 (after tax/401k - takehome) to get 8.35% to get my Roth IRA contributions for a total 19.35% of income going to retirement. Is this accurate?

Sorry if I sound ignorant. I started my 401k last year and my Roth IRA this year and still learning.

 

[braumeister]

$96,000 X 6% = $5,760 to 401(k)
$5,500 to Roth IRA
Total $11,260

$11,260 / $96,000 = 11.7% of total income

Don't forget, you'll still be paying taxes in retirement.

 

[Midpack]

You can calculate it any way you like and get different % results, but I think what Braumeister has shown is how most folks calculate it, self included.

 

[youbet]

$96,000 X 6% = $5,760 to 401(k)
$5,500 to Roth IRA
Total $11,260

$11,260 / $96,000 = 11.7% of total income

Don't forget, you'll still be paying taxes in retirement.

Another reasonable way would be to also add the employer's matching contribution to the 401k to both the retirement contribution and the salary.

But, as Midpack points out, there seem to be a lot of folks doing it the way braumeister demonstrated. The important thing is that the number you calculate is, on a relative scale, meaningful to you and gives you guidance in reaching your goal.

 

[BuysToys]

I never added my employer contribution into my "personal" calculations until I was vested. If I didn't stay someplace long enough, the funds really weren't there. When I did, it was just a fabulous bonus!

 

[Cessna5354]

BobDole,

Welcome to the board, and I always wondered what you made from the ED commercials.........

Welcome & Have Fun working to ER !!

 

[DeborahB]

bobdole,

welcome to the board, and i always wondered what you made from the ed commercials.........

Too funny!

 

[rodi]

I've had the same questions - I see people counting the employer contribution in their percent of salary saved (numerator). But they aren't increasing their salaries (denominator) by the employer contributions... so it's kind of bad math.

Lets say you make $100k base salary.
Employer match is $10k.
You contribute 10% (10k)
10k/100k = 10%... straight forward.

Yes your 401k goes up 20k, not 10k, which is 20% of your salary but your remaining salary is only reduced by 10%.

So it's either count the 10% (and ignore the match except as a net worth "woo hoo".)
Or it's do the math as
Salary = 100k + 10k match. (110k)
Contributions are 10k + 10k match. (20k)
20k/110k = 18%

But folks don't typically do that.

I personally do the math with the things that I have control over... My salary, my 401k contributions. Company match is awesome, but it's not something *I* am saving.

 

[karluk]

I've never enjoyed an employer match, so I don't know how I would do the math. My gut reaction is that the match should be included in both retirement savings and gross income. The main reason I can think of to leave it out completely is to avoid complacency - just because you're lucky enough to get a match doesn't mean you shouldn't also be trying to save as much as possible on your own.

 

[Accidental Retiree]

I never added my employer contribution into my "personal" calculations until I was vested. If I didn't stay someplace long enough, the funds really weren't there. When I did, it was just a fabulous bonus!

+1

 

[devans0]

Percentage calculations are motivators for savings, but the other percentage realistically represents retirement spending. If I have a life that feels abundant in what is important to me, then I know my retirement 'number'.

What I go back and forth on how to treat Roths. I pay extra in taxes to max out my savings while I have it. This will be tax pre-payed money. Future taxable income is lowered, thus also making IRA and 401k money more valuable too. Future benefits will be tied into these taxable funds. That can affect social security tax rates, medicare rates, and possible benefit curtailing to those who "don't need it".

 

[Tyro]

Sorry if I sound ignorant. I started my 401k last year and my Roth IRA this year and still learning.

Sorry if I sound ignorant, but we never calculated any kind of percentage. We always thought the idea was just to LBO(ur)M and sock away as much as we reasonably could, so that's what we did.

Tyro

 

[RobertD]

Thanks for all the responses everyone! You've made me feel very welcome. My empolyer's 401k match is fairly generous - $1.00 for every dollar up to 4% and $0.50 for every dollar on the next 2%. I suppose that's simpler to just say 5% match on a 6% contribution as that's what I put in currently. I've been contributing to my 401k for a year and some change now.

I like the idea mentioned of adding the employer match to your gross income in addition to adding the match contribution % to your 'total retirement contribution percentage'. Do we have a acronym for that? TRCP? heh

I'm not sure I'm onboard with just taking the IRA contribution and dividing it by gross income to get that contribution percentage and adding it to the calculated 401k percentage. The comparison doesn't seem valid as the 401k is pretax and the Roth IRA is after tax. It makes the most sense to me 'convert my $5500 Roth contribution and convert it back to the pretax amount and then get the percentage by dividing the pretax Roth contribution by gross income.

Maybe I'm just trying to make this to complicated and it really isn't that important...

 

[braumeister]

Maybe I'm just trying to make this to complicated and it really isn't that important...

That depends on how many decimal points you want in your percentage calculation.

No worries; you're on the right track.

 

[ERD50]

... we never calculated any kind of percentage. We always thought the idea was just to LBO(ur)M and sock away as much as we reasonably could, so that's what we did.

Tyro

Agreed.

Maybe I'm just trying to make this to complicated and it really isn't that important...

Yes, I think you are (making it complicated), and it isn't (important). Regardless how you calculate it, it is just a number. So if one calc gives you X.xx% and another calc gives you Y.yy% - it doesn't affect your retirement plans, it doesn't drive any action. It is the amount that will feed your future plans.

Focus on what is important is what I suggest.

-ERD50

 

[tinlizzy]

Maybe I'm just trying to make this to complicated and it really isn't that important...

It's really not important - the % you save. A 21 year old saving 10% per year will retire with more money than a 40 year old who just started saving 10% per year (all things being the same, of course).

Try solving the equation backwards -----> What age would I like to retire? How much money will I need per year? How much money is required to draw X amount per year and at what withdrawal rate (2%, 3%, 4%, etc)?

Or seal all the leaks in your budget and just save "the rest". I think that's what most people here do.

 

[Midpack]

Maybe I'm just trying to make this to complicated and it really isn't that important...

Like others, I think you may be making it unnecessarily complicated, but what's your ultimate purpose?

Maybe ask yourself, if you get X% (braumeister & many others simple method) or Y% (your proposed tax adjusted and/or 401k match method) - what would that difference cause you to do? Would it change your contribution somehow? If not...maybe it's not important.

I was always focused on how much I needed to save each paycheck/month/year to reach my FI goal. I never even calculated what percent of my income it was, until I started reading about it here and other places. % of income was not a goal in itself IMHO, and it would have varied each year anyway. YMMV

 

[Rambler]

I would say to focus on a more important equation:

($x per year) x (how many years) = (what I need),

And:

(What I need) = (how much I plan to spend)/(my personally comfortable SWR)

Good luck

R