Early Retirement Extreme Forums

Is this a reasonable way to calculate your savings rate:

Saving rate = (Employer contribution + Employee contribution) / (Take home paycheck + employer contribution)

It depends. For what purpose are you calculating your savings rate?

Good question. I'm making sure that I'm on track in terms of early retirement.

Perhaps it is a silly guide post and we should just save however much we can save?

Yes, a dollar saved is a dollar saved, no matter where it came from. What you ultimately care about is "how many dollars do I have" and "how much are my expenses."

The savings rate as a percentage of income really can't tell you when you will accumulate enough, unless your income and and your expenses are both fixed.

Savings rate is not that relevant.
Consider for example my case: I lived and worked in NYC for 6 years, with a savings rate of around 45% of net income.
Now I'm back in my hometown in Italy, and my savings rate is 70% approximately.
I was stashing away more absolute money when in NYC, so assuming I was planning to early retire in Italy, I would have been better off saving 45% in NYC.

The only thing that matters is how much money you have relative to your estimated expenses once you stop working, which could be very significantly different than the ones you have while working.

brute thinks SR is still a nice metric, but mainly to compare to oneself in a similar situation. as long as karim sticks with one method of calculating, it can be useful to compare month to month savings. of course it doesn't make much sense to compare to a SR from a completely different situation, like Seppia mentions above.

I would just like to jump in (very late, searched to find relevant topic as I know it gets re-posted everywhere, often) and re-iterate @seppia's, dragline's sentiment. The typical calculation I know is: It doesn't give you any high level of assurance (the shockingly simple math is a lie! (its simplified assumptions)). It's a nice number to get people interested in FIRE/ERE, I think.

You can tweak the simple formula to be: to get a little closer for seeing where you fall on the shockingly simple curve, but it's at this point I imagine most people would tumble down the hole of retirement simulators/calculators/spreadsheets like the rest of us did.

Your calculation is a reasonable one for savings rate. There's nothing wrong with it as a metric, although as others have pointed out it doesn't tell the complete story by itself. I calculate it, but at this point really only because once I programmed it into my financial spreadsheet, I get it automatically. If I had to work for it I might not keep it up.

Metrics are good for some people, and not so good for others. I'm a numbers person so in general I enjoy them just to have the information. If it motivates you, keep looking at it, and maybe see if you can find ways to bump it by a few percent here and there.

I have this discussion on a regular basis with my manufacturing clients. Percentage margin is a wonderfully sparkly thing, but it can't compare to dollar margin. In the end, it's all about money. Not budget variance, performance graphs, whatever.

My possibly obscure point is that it's all about dollars (or your particular currency). Don't get too hung up on percentages, because you can't spend those unless you retire in the exact same circumstances you're experiencing in your working life. Maybe a better analogy would be the old one about bringing a knife to a gun fight.

Agreed. Any time savings rate comes up (or COL vs Salary, etc) I usually stress one should usually be seeking to maximize the "net_total_savings" number, not the SR. It's still not always that simple (for that you need to understand what goals you are optimizing towards), though.

In German there are two words regarding SR:
- "Sparquote", meaning the relative percentage one saves, e.g. 75%
- "Sparrate", meaning the absolute amount one saves, e.g. 2500 €/$...whatever

Are there also two words in English?

When I use the Google Translator, then I get the following results:
- savings rate for "Sparquote", the relative percentage %
- saving rate for "Sparrate", the absolute amount €/$...whatever

Does Google translate it correctly?
Or are there not two words in English, which distinguish between the two SR meanings?

@wolf German speaker here . I've never heard a person use the word " sparquote " when talking about personal finance and savings . Only in the business section of the newspaper, when a company has reduced costs due to for example a new efficient technology or laying people off , etc

I don't think there's a specific word for each, they would simply translate to:
"savings rate in percentage"
"savings rate in dollars/euros/currency"