“How soon can I retire?”
This is one of the top questions we receive, both from clients and friends and family members. It is only followed by, “How much money do I need to retire.” Our answer to both questions is always, it depends.
Retirement readiness is not about getting to a certain age (unless you can retire entirely on Social Security, but I do not advise that!) or acquiring $1 million or $10 million, despite the clickbait articles with titles like “Millennials Will Need More than $5 Million to Retire!” Really? Watch this millennial retire on way less—thank you, compound interest!
A much better indicator to determine how soon you can retire is your savings rate. For the purposes of this article, your savings rate is not the money you are putting into a high-yield savings account. Your savings rate is the percentage of your income that you are saving and investing for retirement or mid-to-long-term goals. It is the percentage of the money you are bringing in that you do not need to survive each month.
Your savings rate, not the amount you save, is what matters. Whether you make $30k or $30M annually, the percentage of that income you save and invest is the key indicator regarding how soon you can retire. If your savings rate is 50% on your $30k salary, you can retire just as quickly as someone making $30M with a 50% savings rate.
Savings Rate Math
Most folks recognize that raising your savings rate means more retirement savings, meaning more money to get you to retire sooner. If you boost your savings rate from 20% to 25%, you will accumulate the money you need for retirement more quickly and be able to retire sooner.
But raising your savings rate actually impacts your retirement in two key ways, not just one:
Higher savings rates mean more money is saved for retirement.
Higher savings rates mean your expenses are lower, also lowering your FI (Financial Independence) Number.
Let us dive into the second benefit because it is less intuitive than the first: If you raise your savings rate, without any change to your income, you decrease your annual expenses. This then decreases your overall FI Number because you need less money to survive in each year of your retirement.
For example, if you make $50,000 each year and have a 10% savings rate, you are saving $5,000. This means you need $45,000 each year for expenses. Assuming a 4% safe withdrawal rate, your FI Number would be $1,125,000. This means you could retire and forever live at your current standard of living once your retirement investments reach $1,125,000. If you increase your savings rate to 15%, you are saving $7,500 each year. Your annual expenses fall to $42,500. Dropping your annual expenses means your FI Number also drops from $1,125,000 to $1,062,000. That is $63,000 less needed for retirement from a 5% increase in savings rate!*
The amazing part of using your savings rate to predict your potential retirement date is that it does not matter how much income you earn! The chart below shows how long it will take you to hit your FI Number in years, based on your savings rate (and assuming you start with zero savings), regardless of your current income. Check out how your savings rate impacts your path to retirement:
In short, the higher your savings rate, the sooner you can retire, if you want.
What You Must Save
The most impactful part of the preceding chart is often looking at the first four lines. Increasing savings rates from 5% to 10% speeds up your retirement by a decade. With just a 5% increase! Increasing your savings rate from 10% to 20% gets you more than another decade.
We recommend a savings rate of at least 15% because a savings rate that assumes your career will last more than 40 years and receive 7% returns without flaw is risky. Even if you hope to work for 45 or 50 years, that may not happen. Negative reasons—for example, health issues, unemployed periods, or taking time off to care for an ailing family member—may send your plans off course. Positive reasons may as well, like taking time off to have children or enjoy a mini-retirement adventure. Counting on more than 40 years is definitely beyond my risk tolerance, and it is likely beyond yours if you consider the potential outcomes.
Ideally, contributing 20% adds some additional safety. In particular, we encourage reaching your FI Number at least five years before you feel you need to retire, and a 20% savings rate provides that opportunity while still accounting for potential positive or negative retirement path interruptions. This falls neatly in line with the 50/30/20 rule for a reason. It is a low-risk way to save for traditional retirement, and if you do not have any interruptions in saving and investing, you will hit your FI Number a bit early.
I hear you, 20% can seem like a lot of money. Particularly if you are struggling with getting from 15% to 20%, the difference may be made up with generous 401(k) matches or HSA matches, annual bonuses, or side hustle income. For matches, this income does not lower your expenses or FI Number (the second benefit of increasing your savings rate!), but it does increase the amount you are saving and investing for retirement, which helps one side of the equation.
If you cannot fathom getting to 15% right now, still work to gradually increase your savings rate as much as possible. Do not overlook saving and investing altogether just because you can only get to 8%. Anything is better than nothing. Particularly if you are early in your career, this is not the end of the world: Just increase your savings rate with every raise you receive or stream of income you develop. However, if you cannot imagine getting to 15% in the next five years, you may need to make some difficult decisions. If you feel stuck beyond the immediate future, reexamining how you can reduce your needs costs is your best path to make adjustments. Reasonable adjustments to the big-ticket items vary from person-to-person: A single 20-something can easily get roommates, but a single parent of four may not be able to choose that path of reducing expenses. Someone in an urban or suburban area can sell a car and switch to riding a bike, but someone in a rural area may not. Make changes that work for your lifestyle to open up a bit more savings.
Choosing a Higher Savings Rate
Savings rates above 20% are for those who want to retire early, retire rich, pour money into passion projects, create generational wealth, and more. If any or all of those sound like you, go after your dreams and raise your savings rate.
Know that you never need to get to a savings rate higher than 20% just for basic wellbeing. Everything beyond 20% is extra. Why does this matter? You should not put yourself into a position of hardship or severe discomfort to raise your savings rate from 35% to 40% because it is just extra savings. Only raise your savings rate beyond 20% if you know you can do so while still finding happiness in your lifestyle.
If you are happy and have the extra money, getting to 25%-30% adds huge flexibility to your life because you will hit your FI Number in less than 30 years. For most professional trajectories, that means below age 60, maybe even 50 if you are closer to 30% or started saving in your teens or early twenties.
On the FIRE path but not looking to completely eliminate fun in your life today? Save half. Get up to a savings rate of approximately 50%. If you can save half, you can retire in just under 15 years. That means retiring in your 30s, assuming you started saving in your early twenties. This is the approach I follow, and how my plan is to hit my FI Number at age 36.
My own savings rate has not been linear: While my aim is generally to “save half,” in reality, my savings rate has fluctuated between 40%-65% over my income-generating years. At my first career job at age 22, I made $36k as a math teacher in Las Vegas** in 2013 and had a savings rate higher than 50% without intentionally aiming to save half. I just had specific savings goals (saving for DC rent while in graduate school—yikes!) that demanded that level of saving. My largest expense at the time was rent at $440, thanks to my wonderful two roommates, and this expense went down to $250 for half a year when Patrick moved in with me.
So yes, you can save half making less than $40k. Can you do that everywhere and in every circumstance? Absolutely not. If you have the flexibility in your life to make adjustments to increase your savings rate, it is completely possible. However, it is not worth overextending yourself if you have multiple dependents relying on one income, have health issues, or many other realities. In my opinion, saving half while making less than $50k is a 20-something-no-dependents reality that is significantly more difficult later in life.
Which gets to other fluctuations in my savings rate: Last year, I was up above 60% since both Patrick and I had great salaries and side hustles. As you may have heard, Patrick left his GS-15 job at the Department of Justice Tax Division at the end of last year, decreasing our household income. My savings rate was below 50% since the beginning of the year as I absorbed more household expenses. However, I just raised it back to 50% since I negotiated a promotion and raise that took effect in May. (More on that story in the coming weeks!) The point is, even if you have a target savings rate, things will fluctuate because life events change your spending year-to-year, month-to-month, and day-to-day. Have a goal, let things fluctuate, but stay above a threshold that lets you achieve your goals.
Bonuses of a High Savings Rate
In addition to ambitious goals, like achieving FIRE early or creating generational wealth, saving half also sets you up for financial security. If you are at the beginning of your financial journey, saving half will get you a strong emergency fund within six months. If you are splitting that half between your emergency fund and retirement investments, you have a six-month emergency fund in a year. Saving half can help you expedite paying off debt or getting the savings for a happiness spending goal.
As the chart above shows, saving 15%–20% gives you peace of mind and financial safety. Increasing your savings rate higher to 50% or beyond just expedites your track to wealth creation and freedom. Find a savings rate that is right for your lifestyle and goals. If your savings rate is 20% or more, relax and know the probability that you will worry about money is extremely low. You will be able to retire. If you go after a higher savings rate, you will be able to retire sooner. Keep saving and enjoy the journey worry-free.
* I excluded tax implications to simplify the logic, but in reality your tax rate will need to be considered as well. Tax rates are a factor that actually expedite the path to retirement for folks with lower salaries (and fewer income taxes) than folks who are taxed at higher rates due to higher income levels. There are, of course, exceptions to this depending on income source. If you are concerned about how you can calculate how soon you can retire given your tax rate, there are a few approaches. First, for your tax rate now, if you have a low salary and/or high risk tolerance, you can calculate your savings rate based on your post-tax income. If you are risk averse and/or have a high income, your savings rate may be better considered based on your pre-tax income since you pay more taxes. Another consideration is where you are saving and investing your money: If you are maximizing contributions to a Roth 401(k), you will not have to worry about taxes on that money in retirement. However, the gains on contributions to a brokerage account will be taxed, so you should consider how much you will withdraw each year from taxable accounts in retirement. To develop a strategy for your unique financial situation, contact a professional!
** This savings rate was also much easier because Nevada has no state income tax!
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