What is Your Savings Rate? - POLL

[maddythebeagle]

% of gross income going to investments, savings, and paying down mortgage (creating equity).

If you are in a "catch up" phase later in your work life, please indicate or use your average savings rate over your working life.

 

[robert]

If you are behind in your savings goals and want to catch up, you might want to consider seeking a government job overseas. About 5 years ago I decided that I really needed to "goose" my savings rate if I was going to retire anytime south of 60. So, my wife and I accepted jobs overseas, working on a U.S. military installation. One of the benefits is "free" housing that includes utilities. We also receive a tax-free post allowance. With few temptations to spend money on, we've been able to save 60+ percent of our take-home pay. This has worked wonders pumping up our nest egg. I am now on target to retire at 57 with about $1M (spread among a variety of relatively liquid investments) and a small, but welcome COLA'd pension. I would have been looking at retiring in my mid-60's without this detour.

Robert

 

[FlowGirl]

If you are behind in your savings goals and want to catch up, you might want to consider seeking a government job overseas. About 5 years ago I decided that I really needed to "goose" my savings rate if I was going to retire anytime south of 60. So, my wife and I accepted jobs overseas, working on a U.S. military installation. One of the benefits is "free" housing that includes utilities. We also receive a tax-free post allowance. With few temptations to spend money on, we've been able to save 60+ percent of our take-home pay. This has worked wonders pumping up our nest egg. I am now on target to retire at 57 with about $1M (spread among a variety of relatively liquid investments) and a small, but welcome COLA'd pension. I would have been looking at retiring in my mid-60's without this detour.

Robert

We just PCSed to Japan (I'm actually still stateside for another 3 weeks) and from our prior experience we find it a mixed bag but overall a pretty good deal. Almost everyone we know makes money on the tax-free COLA allowance, cars are cheap, and gas on-base there is inexplicably much cheaper than what it is on-base in the US. We have an apartment off base, but as always in the military that money is tax free. The big downside for us is the inability to buy property and accumulate equity in a house. This might work out ok for us though as by the time we return stateside in 2-3 years the housing market might be a little less insane (keeping fingers crossed). We also have friends in Europe who say they have been hit hard by the falling dollar, so maybe it depends.

BTW, because of the way military pay works I find it hard to calculate a savings rate based on gross. Our gross income changes drastically depending where we live (COLA and housing money are based on location, and in the case of being overseas you only receive actual costs for housing rather than a fixed allowance) and what kind of billet the spouse has (jump pay, hazard duty pay, etc.) and even whether he is home or not (family separation pay, sea pay). It makes my head spin, so for planning purposes I just base everything on his base pay which is constant and reasonably predictable, and what his pension will be based on anyway.

 

[Ed_The_Gypsy]

Robert,

This has come up before. It is a very interesting idea. Very, very.

How old is too old to start doing this? Do the feds have a required retirement age? How does one make contact? Where? What skills did you find to be in demand?

Please tell us more.

Ed The Gypsy

 

[Sheryl]

Robert,

This has come up before.  It is a very interesting idea.  Very, very.

How old is too old to start doing this?  Do the feds have a required retirement age?  How does one make contact?  Where?  What skills did you find to be in demand?

Please tell us more.

Ed The Gypsy

Exactly what I was going to say.  And one other question - if you and your spouse both work, how hard is it to both get good positions in the same location?

 

[robert]

In our case, it was easy . . . both my wife and I were in the federal service before we PCS'd (permanent change of station) to Japan. However, only I had a job when we arrived. My wife found a job on post shortly thereafter (spouses are given a preference for on-base jobs). Even though I was in the federal service, I still had to apply for, and be selected for, my present job. Anyone can apply who meets the qualifications set forth in the job announcement. See "USA Jobs" for a list of jobs available.

Many overseas positions are limited to 5 years. However, my position is in "Excepted Service"; thus, the "5 year rule" doesn't apply to me. As I stated in my earlier post, the free housing, cheap cars, post allowance, etc. has really helped my wife and I supercharge our rate of saving (our net worth has increased by about 400k in the last 5 years). However, we did make one mistake -- we sold our house in Seattle before moving overseas. Oh well . . . we'll still meet our financial goals and everything will be in cash. My only regret now is not doing this sooner in my career.

Robert

 

[Ed_The_Gypsy]

Robert,

Where would be a good place for outsiders to find out more? E.g., those of us who are not already inside the Federal womb?

Great post. Thanks again,

Ed

 

[azanon]

% of gross income going to investments, savings, and paying down mortgage (creating equity).

I answered 15% (of gross).   That's the amount i have going to dedicated retirement funds.

Other savings (such as for vacations, cars, emergency funds) are really irrelevant in the grand scheme of things because these funds are eventually spent.  You save them, you spend them, wash and repeat.

Your house ultimately is for you to live in, not to make money on (unless you're into selling real estate).  Sure, i'm building up equity in my house, but i didnt buy it to sell it, i intend to live in it forever.   Even if i move, the equity will just be put into the new house somewhere else.  So again, the amount of home equity I have is irrelevant so i dont count this.   Using a reverse mortgage, and the like, would be completely out of the question for me.   I'm too much of a planner for this. Also if you're asking people to include how much their using to "pay down their mortgage", i hope you realize a good chuck of that is paying interest and not building equity at all.

I would have asked how much are you saving specifically for retirement.   My total savings as you defined it is probably more like 40%.   But who cares about temporary savings;  they're going to be spent in the short term; and most likely before retirement anyway.

 

[SteveR]

In my case, the cash fund I have is a set amount that covers about 12 months of critical expenses; ones that have to be paid e.g., mortgages, utilities, food, insurance, etc. Once that amount is reached, the excess savings go to my investment account to buy more long term stuff depending on what needs to be purchased to stay in balance.

I would disagree Azanon that this money should not be counted as savings. I believe that saving cash leads to transfer of excess cash to more long term investments. This would be especially true for people already taking IRA or 401(k) distributions that end up being in excess of daily needs. Once the cash reserve reaches a certain point it is put back to "work" in long term investments and no longer would be considered as cash but is still truly a savings since it was not spent on daily living expenses.

Other people may do it in a different way but this is what I do now and will continue to do for the future.

 

[laurence]

I think the poll is worded correctly re: mortgage. Sure, I understand the argument about the house being a place to live, not an investment, but debt is debt and paying down/off the mortgage does get one closer to retirement. As far as savings, we have a ~12k pad for the rinse and repeat uses Azanon mentioned, and a Emigrant direct account with about 15k that we are looking for a place to invest like SteveR has mentioned.

Our savings rate is somewhere between 30%-40% depending on how you want to measure.

 

[azanon]

I think the poll is worded correctly re: mortgage.

It was worded correctly, till Maddy had to go and follow-up a clarification to include your mortgage payments (a portion of which is interest), your emergency funds, and any other thing that constitutes "equity".    Which she asked in the poll what's your savings rate for FIRE, I intuitively assumed she meant retirement savings.

Maddy, if trolling is asking for you to post a useful poll, then i'm a troll.  I "save" 40% a month or thereabouts, but 25% of that is going to be spent within the next 10 years PRIOR to my retirement.  So who cares?   I certainly don't;  as least how this relates to retirement which is the general topic of this entire messageboard.    Another example, i save 150/month in a 529 plan for my son's college (he's only 2 years old now).   Yes that's savings, but that's his money someday;  not mine to use for retirement.   Its certainly equity in my name now, so you'd have me include that.   As to how that'd be useful to anyone, I havent the slightest clue.

(intuitive info alert;  most realize this)  The reason the poll bothers me, Maddy, is because there's people thinking they're "saving" 40% or more going by this poll, when probably 25% of that or more is really paying interest, paying for something that's only a pseudo asset (such as a house that you live in that doesnt pay you anything that you never sell), going to next years vacation (to never been seen again), to repair that roof, etc and other short term expenses completely unrelated to retirement.   

Expanding on the house, who cares if its worth 250K if you aren't going to sell it.   That's nice to know, but it isnt paying you anything.   And if one's retirement plan is to use that money to fund their retirement via a reverse mortgage, i wish them the best of luck.   Hope they die before that gets used up!

 

[justin]

I am in the very early stages of accumulating assets. I have structured my financial affairs with an intentionally high debt amount to be paid back over my accumulation phase and perhaps the first decade or two of retirement. I counted the portion of my debt payments that go to pay down principal as "savings". It really is savings, since the debt I am servicing was invested. Also, paying down debt increases net worth just the same as putting the same amount into a savings account. Debt, if structured correctly with beneficial terms, can be very helpful in the accumulation of wealth. A home may not be an investment. For me, the proceeds from my mortgage on my home were invested (I bought it with cash, then "refinanced" it by getting a mortgage a year later). My savings rate is 46%, which is about what it would be whether I had the debt or not. The debt payments I currently make would be invested instead of going to my creditors.

 

[azanon]

I'm just trying to figure out how the information is useful.  Going by Maddy's definition, the average american would exceed 20% savings easily.   We know this is true because i've read countless articles about how people have overbought their houses, and Maddy clearly said to include your house payment.    There's folks paying 30% alone JUST for their mortgage, so I find it hard to imagine someone wouldn't check the 40%+ selection if they followed Maddy's clarification to include all equity savings + your mortgage payment (a portion of which is interest).

If we're talking about net worth, that's another thing alltogether.  The original post asked how much are you saving towards FIRE.   I simply answer 15% of gross goes into dedicated retirement funds.    The other 85% pays for taxes and things i use today (such as the house i live in).

I'm really not trying to pick on you maddie. I read the post first, and i think, wth?, and damn if it isnt you every time.

 

[laurence]

I would agree that strictly the principle reduction, not interest payments, should be considered in this equation. The affliction that allows people to forget they are spending some of their savings on toys etc. seems to be related to the "hey look at all the money I got from my tax return!". For the purpose of this poll I selected 31%+ and included:

401k + matching
Roth IRA
Reduction in principle on mortgage (my only debt)

because all three directly benefit my FIRE chances.

 

[justin]

Maddy currently has it right. I took the "paying down mortgage (creating equity)" to mean the portion of mortgage payments that pays down the mortgage (creates equity). This does not include the portion of your payment that pays interest. I don't know how else to interpret what he wrote. It is pretty clear.

If I did not include my mortgage payments in my savings rate, then I would have excluded $15000 of mortgage prepayments I have made year to date. Financially, what is the difference between paying $15000 on a mortgage and buying $15000 worth of bonds at the same interest rate and maturity/payoff date as your mortgage?

 

[azanon]

If "I" was interested in how much you were saving for retirement Laurence, i'd kindly ask you to refigure it without the mortgage.

 

[azanon]

Financially, what is the difference between paying $15000 on a mortgage and buying $15000 worth of bonds at the same interest rate and maturity/payoff date as your mortgage?

One pays you interest every month, and the other doesn't.   One is immediately liquid and one isnt.   One is meant specifically to fund something, and the other is meant to live in.  I bet you can guess which is which.

My house serves one purpose;  to live in.    If some of you other guys are buying them as investments, i wish you luck in that.   I intend to live in mine, and its not for sale.   It doesnt generate income, and i have to pay for it every month, just like i do every other "asset" item i own (last part meaning, all my assets cost me money, and never paid me back).  Even after its paid for, it'll still cost me money in the form of upkeep, property taxes, etc.   It will never pay me anything.

I can ebay just about anything i own.  That doesnt mean i should go listing all my assets as a retirement items.

 

[SteveR]

Paying off the mortgage or paying down any other debt is not the same as saving cash for other investments.  It is like the marketing people who are always trying to convince you that you are "saving" 50% by purchasing something that is half price.  You are buying something not saving cash.

In my opinioin, cash saved from any source that is available for use (purchase of goods and services or investment with the intent to liquidate for cash later) are examples of savings.  Anything else is either debt reduction or payment for goods or services purchased for use.  Realestate and investment debt are still debts despite the fact that they may generate income (cash through rents, dividends or interest.)  The future value of a non-liquid asset is cash only when it is sold.  I can see this as investment income but not as savings in the strick sence that it is being discussed here.  

My two cents worth.  

 

[FlowGirl]

I agree with Azanon's point that there is a difference between retirement savings and more temporary savings. I guess its all going to get spent eventually, but the vacation I'm saving for to go next year doesn't really impact my ability to ER at all, even if the cash I've accumulated for it does make my savings account temporarily bigger.

Whether to include a mortgage and/or other debt in one's savings rate I think depends on what you are trying to measure.

 

[azanon]

Dead on Flowgirl. That's my point.

I think mortgage/debt, stuff like that would be great in a net worth discussion/poll. In my net worth calculation (quicken for instance), i include debt, home/car loans, all savings, etc. But that's net worth.

 

[FlowGirl]

For the purpose of this poll I selected 31%+ and included:

401k + matching
Roth IRA
Reduction in principle on mortgage (my only debt)

because all three directly benefit my FIRE chances.

Does everyone else include their 401k matching in their "savings rate"? My spouse gets no matching on his TSP, but his killer pension will be the key that allows us to retire very early. It would never occur to me include the pension value in our savings rate, but then unlike matching its not a guarantee until he actually retires.

I guess my main interest in the poll is to see how much sacrifice people are putting themselves through to achieve FIRE. Including mortgages, debt, and 401k matching doesn't really give me a feel for that, but then its not my poll.

 

[Cal]

Does everyone else include their 401k matching in their "savings rate"?  My spouse gets no matching on his TSP, but his killer pension will be the key that allows us to retire very early.  It would never occur to me include the pension value in our savings rate, but then unlike matching its not a guarantee until he actually retires. 

I guess my main interest in the poll is to see how much sacrifice people are putting themselves through to achieve FIRE. Including mortgages, debt, and 401k matching doesn't really give me a feel for that, but then its not my poll.

I didn't include the pension or the 401k match in my %. My 401k match is pretty small (but better than nothing) and who knows if my pension will be around when I retire. But, in both cases, even though it will help my retirement, it's not income that I could spend or do anything else with - in other words, the pension and 401k match are there whether I want them or not, whether I do anything or not. When discussing savings rate (especially when comparing myself to others) I always think of it as how well I am managing money that is WITHIN my control and will contribute to my retirement.

 

[laurence]

If "I" was interested in how much you were saving for retirement Laurence, i'd kindly ask you to refigure it without the mortgage.

Well, what's critical is that one uses the same measuring tool each time one measures, but since you asked SO nicely, I think that takes it down to 25%


I include my 401k matching but not my pension. The reason for this is I consider it part of my compensation, and the cash spends just as well. My pension, well, who knows what it will be worth 35 years from now when I can collect it, too many variables there. I leave the company and it goes poof, but the match rolls into the IRA nicely.

 

[justin]

quote from Justin:

Financially, what is the difference between paying $15000 on a mortgage and buying $15000 worth of bonds at the same interest rate and maturity/payoff date as your mortgage?

One pays you interest every month, and the other doesn't. One is immediately liquid and one isnt. One is meant specifically to fund something, and the other is meant to live in. I bet you can guess which is which.

Azanon,


Prepaying $15000 on my mortgage will reduce the amount I have to pay by about $50 monthly (adjustable rate mortgage). Instead of paying down the mortgage, I could buy $15000 of bonds, and get $50 monthly in interest. Which I would then have to use to pay down the mortgage. Financially, I would be in the same position each month if I paid down the mortgage, or if I bought the bonds.

Bonds may be immediately liquid, but the value fluctuates with changes in interest rates. My $15000 prepayment of the mortgage can also be immediately liquid - apply for a free no closing cost HELOC in the amount of $15000 - my newly created equity. Alternatively, I can refinance into a new ARM at the same market rates as my existing ARM and get at the $15000 that way. I concede the mortgage prepayment introduces some illiquidity.

"One is meant specifically to fund something, and the other is meant to live in."
This is a riddle to me. I don't live in my mortgage. Do you? I live in my house. It happens to secure payment of my mortgage note. The house and any debt secured by said house can be looked at as two separate entities.


I'm in agreement with you on your desire not to include the interest portion of mortgage payments. However, repayment of principal amounts of debt increases net worth, and in my opinion should be included in the definition of "savings" as Maddy did. Any amounts added to the principal balance of a debt should be subtracted from what you saved.

Lets look at the typical American living paycheck to paycheck on credit cards. He charges $1200/month for personal living expenses. This is $1200 spent because the principal balance on his credit card increases by $1200. Assuming he doesn't pay down this credit card, and then saves $1200 in his 401k, his net savings for the month would be zero. The $1200 of 401k contributions would be savings and the increase in the principal balance owed on the credit card ($1200) would offset the savings, making the net savings amount zero for the month.

When I say I'm counting payment toward debt principal as savings, I would also count new debt incurred as a reduction in savings. You may not like my system, but I think it makes sense if you count the debt you incur and the debt you repay. I also don't think it overstates your savings rate on a long term basis.

 

[cons]

i agree with azanon regarding his posts about not including your mortgage payment

i included only my retirement accounts:
-401(k)
-ROTH IRA
-taxable investment accounts

which put me in the 26-30 percent