Is a 50% savings rate impossible with a middle-class income?

[vanuber]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

[Andy12345]

What’s middle class these days? Our house hold income is 80,000/year. Yes saving 50% is impossible. Seems logical that the earlier someone wants to achieve financial independence the more they need to earn.

[Maverick3320]

In general, salaries rise with age.

Without knowing your exact spending, it's hard to come to any conclusions there.

[Harmanic]

During our early working years, we only managed 15% contributions. When the mortgage was paid off and the nest emptied, we have been able to bump that up to close to 70%, which allowed us to quickly catch up and surpass our retirement goals.

It is aggravating to hear pundits say that it is too late to start saving in your 40s and 50s. Sure, it is good to save when younger, but you can easily catch up in your peak earnings years without depriving yourself and your family of a good life (travel, education, etc.) when raising a family.

[retireIn2020]

I have a friend who, back int the 1980's had a middle-class income and lived in a trailer with his wife and 2 daughters at the rural edge of the large metropolitan area where he worked. They drove old used cars and never spent money on nicer things.

I always asked him why they lived so significantly below his means. He would say, "someday we're going live significantly above our means"

We'll, they are very financially independent today.

In my experience, I would say it's very possible but what are you willing to give up?

[delamer]

Your fixed expenses aren’t really fixed.

You made choices to live in that house, purchase those subscriptions, use that childcare provider.

And they can all be reduced.

But most people — myself included — don’t want to make the sacrifices in comfort, convenience, and safety that would allow them to save 50% of their post-tax income.

Unless you want to FIRE, have a highly variable income, or a job that’s very insecure, that goal seems like an unnecessary constraint.

(I haven’t listened to the podcast.)

[Cat Herder]

I was doing about that before I punched out of full time employment. I am a solo dude who was making just a little more, but in a HCOL area.

It's probably a lot harder to hit such savings for a family than a lone adult. Paying for childcare is a real wealth killer. Many spouses who are not as enthusiastic about FIRE may be less than helpful in keeping expenses down, or it may trigger a costly divorce.

A FIRE fan really focuses on minimizing expenses. Some, such as housing and vehicles, make enormous obvious impact. Others (entertainment, clothing, food, drink) are subtle but really add up.

[windaar]

An independent single person can easily decide to save 50% of their income and to adjust living expenses accordingly. Once you get married, you only have half a vote about living expenses. Once you have kids, you are on the hook for many significant unavoidable expenses. Buy a house and the same thing. Can a typical middle class family of 4 with house expenses and 2 cars suddenly increase their savings to 50%? No.

[Johm221122]

Last year I made $65,000 and saved $34,000

I live in a LCOL area and single

[KlangFool]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

vanuber,

It is very simple but hard.

A) Are you willing to live like a household with an annual gross income of 80K? That is the key. Live like someone with 2/3 of your actual gross income.

"Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000"

B) They are NOT fixed expense. You choose to spend on those items. Nobody is forcing you to live and spend like this. For example, you CHOOSE to buy this house. You could choose to buy a cheaper and smaller house.

C) By treating them like fixed expense, you no long assumed the responsibility of spending that money.

D) You choose to "Spend First and saves later". If you live like someone with a gross income of 80K, you would save 40K first and adjust your spending accordingly.

I save 1 years of expense every year. Aka, approximately 50% of after-tax income. My household income mostly around 150K level with my household range from 4 to 2.

KlangFool

[avalpert1]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

[oldfatguy]

"Middle class" is a wide range. One common definition to use in social science research is 67% to 200% of the median household income. Then it varies, of course, if you are looking at national, state, or MSA data. The latest national data is about $74,000.

Is it possible to save 50%? Sure. But it probably isn't desirable to do so, especially at the lower end of that range, because the resultant lifestyle would not be satisfactory to most people.

[GP813]

"Dual income no kids" can easily do it, especially when both are high earners. Young children are expensive, that is the biggest obstacle.

Your savings rate is very impressive anyways.

[runner3081]

It really depends on so many factors. Paid off house, affordable area to live, etc.

[8foot7]

I would argue it would be difficult in most areas on under six figures a year, particularly with child care.

[Bill 5431]

We haven't hit 50% quite yet, but we're doing well. 47% or so. House paid off, no car payments, no credit card debt, medium cost of living area (south-central PA, semi-rural area). $7400/month after taxes, typically invest $3500/month or so. Have a 16-year old boy, college fund is decent.

We're frugal but not crazy about it. We still eat out once in a while, 2-3 concerts a year, mostly stay-cations but occasionally a weekend trip somewhere. I find that keeping track of expenses pretty faithfully helps me keep said expenses under control. The few years I got tired of tracking it all, our spending went up and we invested a lot less. Easy to do.

[KlangFool]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I disagreed. Because if you believe that, that means US median household is living like a pauper.

https://www.cnbc.com/2024/07/11/the-med ... mpare.html
"The median income among the largest 50 U.S. cities as a whole is $77,046, which is more in line with what most Americans typically earn. In 2024, the median annual household income is estimated to be $78,171, according to data consulting firm Motio Research. "

KlangFool

[avalpert1]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I believe that a household who has an income of ~$200k (which is what it would take, minimum to have a savings rate of 50% with that level of spend) isn't middle class.

And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line.

That's kind of my whole point.

[alfaspider]

OP: what do you expect people do who make half of what you do? Median household income is a bit under $80k, and a substantial fraction of the population makes a lot less than that.

The answer is their lifestyle is downscale from yours. Your "fixed expenses" are $4,000. There are many families who don't take home that much in a month. They may live in a small apartment, a mobile home, or some other rental situation that is considerably cheaper than yours. They cannot afford a licensed childcare facility and make-do with some combination of family help, informal childcare arrangements, or unlicensed childcare facilities.

So to answer how you would save 50% of your current salary: you would live like someone making half of what you do. Not wanting to do that is perfectly understandable. It's one thing to live on half of your salary when you make $500k a year. It's quite another to do it when you make $100k a year (or $50k for that matter)! Such aggressive savings rate is great if you can swing it without undue pain and would allow very early financial independence, but it's hardly a precondition to having your financial house in order. If you just want to retire at a normal age, savings 20% should allow you to do that comfortably.

If your circumstances were different, it might be a lot easier. When you are young and single with no dependents, a shared apartment with multiple roommates may actually be fun and very affordable. I had a great time living in a 4 bedroom apartment for $350 a month when I was in college (the same place would probably be probably $700 in today's real estate market). When you are a family of 4, a setup like that is probably not a desirable or even viable option.

[alfaspider]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I believe that a household who has an income of ~$200k (which is what it would take, minimum to have a savings rate of 50% with that level of spend) isn't middle class.

And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line.

That's kind of my whole point.

I think "Middle Income" is a more helpful phrase than "Middle Class" for this discussion. The concept of "class" gets wrapped up in a bunch of cultural and status-based concepts that are only tangentially related to how much money you make. A Phd candidate teaching assistant at an Ivy League school may make an income below the poverty line, but they are not typically considered "working class." A working class person who wins the lottery doesn't automatically enter the same social circles as the British royal family.

[cosmos]

Also some of the terms have different meanings depending on where you live. I am a single earner with a nice income in a VHCOL area but cannot save 50% of it due to the "middle class" lifestyle costs. If I made the same salary back home in the midwest I could likely save even more than 50% or other medium/low cost areas. Although it seems alot of what used to be affordable places are not as affordable anymore.

Knowing what I know now I may have spent my first 20 working years living in a nice van on the coast here.

[Mike Scott]

If you want both parts of FI and RE, you probably do need to be saving in the 50% range or higher starting at a young age. Maybe you can and maybe you can't make that work for your budget. I'm getting close to FI but am too old for what is often called RE. The vast majority of people are not even thinking about the FIRE track other than some magical thinking.

[KlangFool]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I believe that a household who has an income of ~$200k (which is what it would take, minimum to have a savings rate of 50% with that level of spend) isn't middle class.

And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line.

That's kind of my whole point.

avalpert1,

"And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line."

That is not the topic of the discussion. OP has a gross household income of 120K.

So, my question to you is this:

If OP choose to live like a household with with gross income of 80K and saves nothing at "pretend" gross income of 80K, do you believe that OP is living a life like a pauper?

KlangFool

[alfaspider]

If you want both parts of FI and RE, you probably do need to be saving in the 50% range or higher starting at a young age. Maybe you can and maybe you can't make that work for your budget. I'm getting close to FI but am too old for what is often called RE. The vast majority of people are not even thinking about the FIRE track other than some magical thinking.

Most of the people I know who've talked about FIRE thought their house flipping or options trading (or some other get rich moderately quick) scheme was going to make them independently wealthy in 10 years. Others have talked about FIRE in a more disciplined way but saw their costs and living standard pressures go up such that it became a bit of a mirage. I know of one person who actually did the "RE" person who was a single lawyer who retired in their late 30s- but even they admit they may end up working again at some point and I have no idea if their savings would really allow going the rest of their life without working at all.

[rogue_economist]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

Basically yes. FIRE is really only for those with high incomes (ideally two incomes) and no children despite what the boosters and pundits will tell you. And even a lot of those people are going to find themselves back at work in the event of a serious downside scenario.

[FlowWithTheGo]

You could do it, but you are doing great. The childcare expenses will drop off soon, your income will probably go up and you can evaluate then. Time better spent is either advancing income or enjoying time with kids imo.

[Lawyered_]

No, it is not impossible. It may be impossible for you to live the life you want to live while still hitting it, but you are making that choice. As others have pointed out, your expenses are not "fixed". You can increase or decrease them at any point. It is the same thing for retired people who say they are on a "fixed" income. They are not, they can get work any time they like, but they choose not to.

[Silentnight]

That's what makes personal finance, personal. Doesn't it? It's about choices.

You made me look...I got disgusted with my employer and quit in 2022.
Therefore, my last year of wages was 2021 and I earned in 2021 the most I ever made.
Gross: 69,572
FICA/Taxes: 15,271
Net: 54,301
Retirement: 22,504
Rate: 41.4%
Plus, I put back each month for those "lumpy" expenses, whether property taxes, or eventual maintenance items, etc. I don't remember what I put back since those savings were then spent when the lumpy expense happened.

I think saving 50% can be tough depending on income and choices. But not impossible depending on income and choices.

[avalpert1]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I believe that a household who has an income of ~$200k (which is what it would take, minimum to have a savings rate of 50% with that level of spend) isn't middle class.

And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line.

That's kind of my whole point.

I think "Middle Income" is a more helpful phrase than "Middle Class" for this discussion. The concept of "class" gets wrapped up in a bunch of cultural and status-based concepts that are only tangentially related to how much money you make. A Phd candidate teaching assistant at an Ivy League school may make an income below the poverty line, but they are not typically considered "working class." A working class person who wins the lottery doesn't automatically enter the same social circles as the British royal family.

That's fine, it doesn't change the numbers - $200k is not middle income either.

[Walkure]

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes...
Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage.

Based on what I know of childcare, let's say the mortgage is $1,500 of that $4,000, just to make up a number. One way to think of it is to treat the principal portion of your mortgage as forced savings. If $1,000 of the payment is principal, then you've just bumped your "savings rate" by 12.5% (1/8 of monthly after tax)! The other way to look at is that with only $65k left on the mortgage, you've probably got what, another 5 years until the house is fully paid off? At that point the entire cash flow is freed up for savings.

[sailaway]

Of course it is possible, but that doesn't mean that the lifestyle entailed is right for you and your family. For my mental health, I need my home to be relatively quiet and in good repair. I don't need fancy or big, just finishes that aren't so degraded that nothing ever seems quite clean and appliances that don't need repaired every other month. That isn't always going to be an option at lower spending levels.

A strong community can be a factor in keeping costs down as well. When community elders provide childcare, the costs tend to be minimal. Free labor might not be available to you and what you spend on childcare might be a great input in your community. Again, lowest cost isn't always the goal.

Maybe it is just because they don't know how to prepare them, but a lot of people seem to think a diet heavy on rice and beans would be miserable.

You need to balance savings with the spending that is actually important to you. Sometimes we don't sit down and separate our own priorities from societal expectations until after we have a mortgage with all the sunk costs involved there.

[avalpert1]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I believe that a household who has an income of ~$200k (which is what it would take, minimum to have a savings rate of 50% with that level of spend) isn't middle class.

And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line.

That's kind of my whole point.

avalpert1,

"And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line."

That is not the topic of the discussion. OP has a gross household income of 120K.

So, my question to you is this:

If OP choose to live like a household with with gross income of 80K and saves nothing at "pretend" gross income of 80K, do you believe that OP is living a life like a pauper?

KlangFool

Except it is the topic of discussion. The OP says he has after tax income of $96k, to save $60k of it would require him limiting spending to $36k - which is not living like a household with $80k gross income, it is living close to the poverty line for a family of 4.

In order to live like that household while saving 50% they would need an income more like $200k, which would not be middle income.

[mw1739]

I think if you really want to lean into the "RE" part of FIRE (i.e. retire early) a 50% savings rate is reasonable, if not required. If you're content retiring in your 50's or 60's, the standard 15-30 percent savings is perfect fine, and attainable for most middle class folks.

[KlangFool]

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I believe that a household who has an income of ~$200k (which is what it would take, minimum to have a savings rate of 50% with that level of spend) isn't middle class.

And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line.

That's kind of my whole point.

avalpert1,

"And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line."

That is not the topic of the discussion. OP has a gross household income of 120K.

So, my question to you is this:

If OP choose to live like a household with with gross income of 80K and saves nothing at "pretend" gross income of 80K, do you believe that OP is living a life like a pauper?

KlangFool

Except it is the topic of discussion. The OP says he has after tax income of $96k, to save $60k of it would require him limiting spending to $36k - which is not living like a household with $80k gross income, it is living close to the poverty line for a family of 4.

In order to live like that household while saving 50% they would need an income more like $200k, which would not be middle income.

avalpert1,

From OP's first post.

"he suggests a rule of thumb of saving/investing 50% of your income after taxes. "

It is 50% of after-tax income. 50% of 96K = 48K. That means limit his spending to 48K.

It is NOT 50% of gross income.

KlangFool

[alfaspider]

The problem is the premise that it should be possible (without taking big risk or living like a pauper) for those on middle-class income to retire at a relatively young age.

Why would one think that would be likely true where labor is priced at competitive market rates?

avalpert1,

Do you believe a household with an annual gross income of 80K is living like a pauper?

I believe that a household who has an income of ~$200k (which is what it would take, minimum to have a savings rate of 50% with that level of spend) isn't middle class.

And I believe that a household with a gross income of $80k will have a hard time saving $40k and not live a life at about the poverty line.

That's kind of my whole point.

I think "Middle Income" is a more helpful phrase than "Middle Class" for this discussion. The concept of "class" gets wrapped up in a bunch of cultural and status-based concepts that are only tangentially related to how much money you make. A Phd candidate teaching assistant at an Ivy League school may make an income below the poverty line, but they are not typically considered "working class." A working class person who wins the lottery doesn't automatically enter the same social circles as the British royal family.

That's fine, it doesn't change the numbers - $200k is not middle income either.

I think it can be an important distinction because $200k could be "middle class" without being "middle income" in some parts of the country. For example, a public school teacher and a police officer could have a HHI of $200k in Manhattan. They may be "high income" by national standards, but they are likely to be culturally middle class and have a lifestyle that most would associate with the middle class.

[CletusCaddy]

"Middle class" is a wide range. One common definition to use in social science research is 67% to 200% of the median household income. Then it varies, of course, if you are looking at national, state, or MSA data. The latest national data is about $74,000.

Is it possible to save 50%? Sure. But it probably isn't desirable to do so, especially at the lower end of that range, because the resultant lifestyle would not be satisfactory to most people.

Median family income for a married couple with kids is $120k, exactly where OP is.

[Sandtrap]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

to op:
A 50% savings rate is near incomprehensible "for you", with your financials, and lifestyle situation. For you.

Except for living at poverty or above poverty levels with very low income, or paycheck to paycheck, a 50% savings rate does not depend on level of income. Some or many "high income earners" are not able to save at all due to the lifestyles (high income high expense) that can come with that high income.

There are many that have at least a 50 percent savings rate that are content to live modestly (not uncomfortably), rent where rents are reasonable, and focus on earning and saving, often with the realization and acceptance that the delayed gratification of home/mortgage, new cars, nice tree lined neighborhood with sidewalks, will greatly benefit later.

The pathway of; insitutional career/employment, home down payment and mortgage, new car with payments, etc, etc, seems to be the "norm" but it is not, and not for many. One does not have to have good income but live at poverty levels to save substantially.

Congratulations on your savings level and successes at your stage of life and finances. Many save far less or not at all. It is not a given.

j

[CoAndy]

I focus on attempting to save and invest 50% of my gross income rather than net. Investing in 401(k)'s and a 457 or 403b before taxes can get you to your 50% goal easier than focusing on saving 50% of net take home pay.

[dcabler]

Never did I ever target saving any percentage of income.

I focused on saving what I could. When my employer started a 401K, I threw that year's raise into it. Each year's raise likewise went to it until I was maxing out what I could put there. Was meanwhile saving into my taxable account.

I worked in an industry that had bonuses, RSU's (stock options before those came along), ESPP and sign-on bonuses when you started working at a new company. Unless there was an immediate need, I always invested all of that, after taxes. Other than lumpy savings from those sources, I invested a fixed dollar amount monthly - not based on any percentage but it was what I saw as excess vs. any spending I was doing. Rinse and repeat for almost 40 years and I retired with after tax spending capacity well above what I could spend while still working.

There are a lot of ways to get to the finish line, but it almost always starts with living below your means and saving any excess.

Cheers.

[LiterallyIronic]

I just listened to the Bogelheads On Investing podcast interview with JL Collins, Episode 053. I am a big fan of JL and his book, Simple Path to Wealth, is what led me to Bogelheads and index fund investing.

During the interview, they discuss FIRE and financial independence and he suggests a rule of thumb of saving/investing 50% of your income after taxes. I have heard this number elsewhere too.

As a middle-class family of 4 (2 adults, 1 young adult child who is mostly independent, and a 1-year old baby), I find this figure almost impossible to reach. For example, our after-tax household income is about $8,000 per month ($120-130K per year gross, $96K net). Our fixed expenses alone, including our mortgage, utilities, insurances, two subscription services, and childcare are $4,000. We live in a MCOL area and are completely debt free other than $65K left on our home mortgage. Our current savings target is 20-30% of our post-tax income, which is a struggle to meet.

What gives? Is this level of savings only for high-income earners?

Impossible? No. My wife stays at home with our two kids. I make $89,000. That's $7,416 per month. I put 18% of that that into my 401k, or $1,335 per month. Additionally, I put $150 per month into our HSA. Then health insurance and taxes come out. After that, I put $580 per month into my Roth IRA and $500 per month into my wife's Roth IRA. That's $2,565 per month across those accounts. That's 34.6% of gross. But you said post-tax income. I lose about $800 per month from my paycheck that goes to taxes. That makes my post-tax income $7,416 - $800 = $6,616. So that turns our savings rate into $2,565 / $6,616 = 38.8%.

Still well below that 50%, you say? Indeed. But that's the amount that we choose to invest, not the amount we choose to save. After all that, we pay $525 per month toward our mortgage (that's the extra principal payment on top of our PITI, which is $780). And we save $100 per month toward a European vacation that we want to do. And we save $250 per month toward my dream car that I want to buy. And we save $50 per month per child in an account for them.

That turns into: $2,565 invested + $525 extra principal + $100 vacation + $250 car + $50 kid A + $50 kid B = $3,540 saved every month. From the post-tax income of $6,616, that's 53.5% (or 47.7% of gross).

There you go. 50% saved of a single middle-class income supporting a family of four.

[Candor]

A solid FIRE plan for a middle income earner generally requires a level of sacrifice that most are not willing to make. No kids, a paid off house and modest needs makes it much more doable.

[teen persuasion]

Not impossible - we have 5 kids, and were saving I believe $54k on a combined $75k before DH retired. Much of that was large refundable credits due to the low AGI after high contributions to pretax 401k and HSA- the refunds were used to fund Roth IRAs for both of us.

We weren't always high contributors. I was SAHM for nearly 20 years before working very part time when the youngest started school. Those high refundable credits were initially used to pay down our high interest mortgage 15 years early. At the point the mortgage was gone and we went to two incomes is when we ramped up out savings rate.

Using the tax system to your advantage is the key.

[WhiteMaxima]

I tried to. But my life style degraded. I only have limited life. What's the point. Being a Miser?

[Andy12345]

Why are some counting mortgage principal as saving/investing?

[KlangFool]

Why are some counting mortgage principal as saving/investing?

They are "House Poor". Besides the house, they have little to nothing else.

KlangFool

[Wanderingwheelz]

I don’t see how it’s productive to get hung up on percentages like that. Do the best you can, while living a life with joy, and let the chips fall where they may. Remember JL Collins is supporting a brand of sorts, not complete different from Dave Ramsey. To use a tired clické, comparison is the thief of joy.

We never tracked our savings rate, by the way. We’re doing just fine at ages 53/49. College taken care of empty nesters.

[alfaspider]

Why are some counting mortgage principal as saving/investing?

Paying down your mortgage is economically equivalent to purchasing a zero-risk bond with the same post-tax coupon as your tax effected mortgage interest rate, albeit with poor liquidity.

[firebirdparts]

I think it just depends only on the definition of middle class.

AI says middle class is between $50,000 and $150,000. Big difference.

Useless information: My parents did live on half their income, and they're really the only people I ever knew that did that. Two people working, no kids. It was a long time ago, but then again, they were firmly "lower" middle class.

Anyway, big factors in life, on the cost side, obviously are:
1. Cost of shelter (this alone defines what letter comes before "COL area")
2. Bottom feeder skills. At my house, if something quits working, I fix it. No limits. No exceptions. My dad was the same.
3. Willingness to spend on lifestyle and I include here my own problem of not budgeting. I can be loose with money. I don't much care anymore.
4. For some folks, health

I think OP is doing amazingly well.

[alfaspider]

Why are some counting mortgage principal as saving/investing?

They are "House Poor". Besides the house, they have little to nothing else.

KlangFool

I don't see why there would be any correlation between how people view payments of mortgage principle and whether they are house poor. Some may use the argument that mortgage payments are forced savings to justify being house poor. But if you are truly house poor you are probably making mostly interest payments on your mortgage.

[Dottie57]

Why are some counting mortgage principal as saving/investing?

I don’t know. And I don’t count home in networth, unless for a loan.