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Save 100% of Net Income?
Old 04-06-2011, 12:59 PM   #1
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Save 100% of Net Income?

I was reading an old article from last year on early retirement that proposes saving 75% of net income if you have a goal to retire early but the extreme frugal lifestyle experienced by the author put me off a bit.

It made me wonder how much my wife and I were saving as a percentage of net income. After crunching the numbers, I was a bit surprised to see that we saved 100% of net income last year. I didn't even realize this was possible, but since we max out contributions to our 401k and 403b, my ESPP (IRS limit), and I receive a decent match from my employer (401k) plus the employer paid cash balance contribution, our net worth increase from pre and post tax saving totaled the amount that we took home. It was a pleasant surprise...and we didn't even try to be frugal!
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Old 04-06-2011, 01:04 PM   #2
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That was possible because you are getting a match and a cash balance contribution from your employer.....(i.e. free money) and because you were able to be very tax efficient. Congratulations!
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Old 04-06-2011, 01:54 PM   #3
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Found the link to the article:

» How to retire in 5 years Early Retirement Extreme: — written by Jacob Lund Fisker, Freelancer
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Old 04-06-2011, 01:56 PM   #4
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Jacob is a frequent contributor on this forum and yes, he is very very frugal!
I'll have to do your calculation, but I doubt we'll see anything like that because our employers aren't quite so generous.
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Old 04-06-2011, 02:25 PM   #5
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I think it's pretty possible even with no employer matching, but I guess it does depend on income level a bit. For example, lets take a hypothetical couple making $200k per year, both maxing out their 401ks. After state and federal taxes, they taking home 65-70% of that, say $140k. Subtract out the retirement contributions and you're just over $100k net. Save $65k after tax, plus the $33-40k in pre-tax savings and you're close to the 100% of net savings.

Now take a couple making $100k combined (about $70k net) both maxing out their retirement contributions ($33-40k) and they only have to save about half of their after tax net income to match their net.

The allowable catch-up contributions (for teachers or those over 50) can also help with the savings ratio, but I agree the employer matching certainly does help, as does the discounted stock purchase (usually a 15% discount, but taxable income gain can be substantial if stock moves up during the period). I always sell as soon as the shares are available so I consider it income not an investment.
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Old 04-06-2011, 02:27 PM   #6
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Originally Posted by kjpliny View Post
I think it's pretty possible even with no employer matching, but I guess it does depend on income level a bit. For example, lets take a hypothetical couple making $200k per year, both maxing out their 401ks. After state and federal taxes, they taking home 65-70% of that, say $140k. Subtract out the retirement contributions and you're just over $100k net. Save $65k after tax, plus the $33-40k in pre-tax savings and you're close to the 100% of net savings.

Now take a couple making $100k combined (about $70k net) both maxing out their retirement contributions ($33-40k) and they only have to save about half of their after tax net income to match their net.

The allowable catch-up contributions (for teachers or those over 50) can also help with the savings ratio, but I agree the employer matching certainly does help, as does the discounted stock purchase (usually a 15% discount, but taxable income gain can be substantial if stock moves up during the period). I always sell as soon as the shares are available so I consider it income not an investment.
This is for pikers. Anyone really trying should be able to save 115%!

Ha
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Old 04-06-2011, 02:35 PM   #7
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HaHa you're right...You just need to have a lower salary and max your 401k!

Let get extreme!

Salary $40k
Taxes $10k
401k $16.5k
Net $13.5k (spend it all!!)

16.5k/13.5k = 122% of net savings!!

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Old 04-06-2011, 02:41 PM   #8
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I was a bit surprised to see that we saved 100% of net income last year.
No. You saved an amout that was equal to 100% of net income. If you saved 100% of net income, what did you live on?
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Old 04-06-2011, 03:36 PM   #9
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No. You saved an amout that was equal to 100% of net income. If you saved 100% of net income, what did you live on?

Exactly what I was thinking...
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Old 04-06-2011, 05:02 PM   #10
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Damn technicalities!

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Old 04-06-2011, 08:38 PM   #11
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I'm with you kj, don't let those crotchety oldsters rain on your parade!
Hey, get off kj's lawn!
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Old 04-08-2011, 11:04 PM   #12
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It's all semantics...

My net income = what's left to spend after all the our savings are deducted.

We spent under 40k last year saved almost twice that. So we saved 100%+ of our net income.... according to my math, anyway. YMMV
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Old 04-09-2011, 10:01 AM   #13
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Right, saving amount equal to 100% of net income is like saving amount equal to 50% of (net income + taxes + other payroll non-savings deductions + savings).
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Old 04-09-2011, 04:22 PM   #14
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Calculating 'net income' by deducting savings is something I've never seen before. But then when you define things funny, you get funny results . . . like somehow saving more than 100% of your income.
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Old 04-09-2011, 04:34 PM   #15
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I think it needs to be rephrased as "last year, after adding in what we got in matching funds and tax deductions, we socked away as much as our net income would have been if we'd paid tax on everything and hadn't saved". At least, I think that's what the OP meant. The above wording sound less impressive on paper, but if explained to someone orally, it would make an impressive story.
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Old 04-09-2011, 05:51 PM   #16
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How 'bout the OP saying this: "I saved as much or more than I spent last year".

OK, it is his thread, so he could define things as funny as he wanted.

But I will give him this. You did well. Congrats!
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Old 04-09-2011, 10:16 PM   #17
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For the last 2 years our net worth increased more than we spent to live. I think of this as 'saving' more than 100%

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Old 04-11-2011, 08:13 AM   #18
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For the last 2 years our net worth increased more than we spent to live. I think of this as 'saving' more than 100%
I don't think of my earnings on my savings as saving.
Just like I don't think of my losses on my savings as spending.
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Old 04-11-2011, 08:19 AM   #19
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How 'bout the OP saying this: "I saved as much or more than I spent last year".
That would imply (give or take the tax breaks and matching contributions) saving 50% of your net income, and spending the other 50%.
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But I will give him this. You did well. Congrats!
Yep - 3% is a struggle for some people!
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