Why Your Savings Rate Matters More Than Your Salary
The Simple Math Behind Early Retirement
It's Not About How Much You Make (Really!)
Previously, we talked about calculating your FI number. That’s the magical amount you need invested to make work optional. This week, I want to blow your mind with some math that seems impossible but is absolutely true:
How long it takes you to reach financial independence is not based on how much money you make.
I know that sounds crazy. Let me prove it to you.
The Real Secret: Your Savings Rate
The only number that matters for early retirement is your savings rate. (The percentage of your income that you save and invest each year.)
Not your salary. Not your investment returns (within reason). Not whether you're a doctor or a teacher. Your savings rate.
Here's a (highly simplified) view that will change how you think about money forever:
If you save this much of your income... you can retire in this many years:
10% → 51 years
20% → 37 years
30% → 28 years
40% → 22 years
50% → 17 years
60% → 12.5 years
70% → 8.5 years
(These numbers assume 7% annual investment returns and that you're starting from zero.)
Wait, What? How Is This Possible?
“Max, this can’t be right! How can someone making $40,000 retire faster than someone making $100,000?”
Here's how: The person making $40,000 who saves 50% needs only $500,000 to be financially independent. The person making $100,000 who saves 10% needs $2.25 million.
Let me break this down:
Sarah: Makes $40,000, saves 50% ($20,000/year), spends $20,000/year
FI number needed: $20,000 × 25 = $500,000 (remember our 25x rule?)
Time to reach it: About 15 years
Jimmy: Makes $100,000, saves 10% ($10,000/year), spends $90,000/year
FI number needed: $90,000 × 25 = $2,250,000
Time to reach it: About 42 years
Sarah retires 27 years earlier despite making 60% less money! (Of course, we can debate whether Sarah’s $20,000 lifestyle is “worth it” to you, but the math is right.)
The Two-Sided Power of Savings Rate
When you increase your savings rate, two powerful things happen simultaneously:
You have more money to invest (obvious)
You need less money to retire (less obvious but arguably more important)
Every dollar you don't spend today is a dollar you don't need to support forever. It's like getting paid twice for the same sacrifice.
Let's say you're spending $50,000 per year and you cut that to $45,000. You just:
Freed up $5,000 more to invest each year
Reduced your FI number by $125,000 (since you need $5,000 × 25 less)
That single $5,000 reduction in annual spending just shortened your working life by several years!
"But Max, I Can't Save 50% of My Income!"
I hear you. Most people can't start at a 50% savings rate, and that's okay. The point isn't that you need to save 50% immediately. The point is understanding how powerful small increases can be.
Going from a 10% to 15% savings rate cuts about 7 years off your working life. From 15% to 20% cuts another 4 years. These aren't small improvements. They're massive!
Here's what different savings rates look like in real life:
5% savings rate: The average savings rate for an American (source). At an estimated 52 years, you will probably need to work until you physically can’t. Don’t do this to yourself.
10% savings rate: The standard retirement advice. Max out your 401k if you make decent money. Retire at 65 and hope for the best. (~42 years of work!)
20% savings rate: 401k plus some additional savings. This extra ten percent savings just cut 11 years of work! Retire at 54 and do what most people can’t.
30% savings rate: This is serious savings territory, and you’re being very intentional about spending. This requires only 24 years of work and you can likely retire in your 40s. (Assuming you start in your 20s)
50%+ savings rate: Full FIRE mode. This is how you retire in your 30s. This is where I was at and in future posts, I’ll share how I did it.
“But Max, I have to be saving 50% every year for that math to work!”
It's impossible to maintain the exact same savings rate every year, but you can move between these levels as your life changes. Have kids and need to drop from 40% to 25% for a few years? That's fine! Also, compound interest favors saving early, so better to save while you’re young and have the comfort to back off if needed.
Where Does All This Math Come From?
I’ll walk through these formulas in depth later on. For now, here is a calculator. You can play with the numbers yourself and see the impact of each factor on financial independence.
“But wait, why are you assuming 7% annual returns in this calculator?”
The S&P 500 index started in 1926. Since then, it has returned between 10% and 11% annually. (source) Subtracting inflation gives you a real return of 7%. (If you don’t know what inflation is, we’ll cover it later. Stay tuned!)
“But wait, why are you assuming a 4% withdrawal rate?”
Also note that I assumed you started with no investments. If you already have savings, you’re already part of the way there! Enter them in the calculator and you can see how much closer you are versus starting at zero.
Income Still Matters (Just Not How You Think)
I don't want to completely dismiss income. A higher income makes everything easier because it's generally easier to save 30% of $80,000 than 30% of $30,000. In fact, you’ll see posts from me later about how to increase your income because it’s an important part of your financial journey.
But here's the thing: most people increase their spending as their income rises. They get a raise and immediately upgrade their lifestyle. Bigger apartment, nicer car, fancier restaurants. Their savings rate stays exactly the same or even decreases. This is the insane standard American financial plan I repeatedly refer to! People often move farther from financial independence when they make more money because they increase their spending, which inflates their FI number.
There are people out there making $200,000 who are living paycheck to paycheck. More money came in, but it all went right back out. We will profile a few of these people in future newsletters.
The secret is learning to keep your expenses relatively stable as your income grows. Every raise becomes an increase in your savings rate, dramatically shortening your path to FI.
The Magic of Compound Interest
I explained the 7% annual compound returns earlier, but compound interest is what makes this whole thing work.
When you invest $1,000 today at 7% annual returns:
Year 1: $1,070
Year 10: $1,967
Year 20: $3,870
Year 30: $7,612
That $1,000 becomes $7,612 without you doing anything except waiting. Now imagine doing that with $20,000 every year for 20 years. The numbers get big fast! ($877,303.54 if you’re being precise. You can see the attached spreadsheet if you want to try other numbers.)
This is why starting early is so powerful. The person who starts investing at 25 will have dramatically more money at 65 than someone who starts at 35, even if they invest the exact same amount.
What About Investment Returns?
You might be wondering: "What if the market doesn't return 7%? What if it returns 5% or 10%?"
Good question! Here's how different returns affect the timeline for a 50% savings rate:
5% returns: 17 years to FI
7% returns: 15 years to FI
10% returns: 13 years to FI
The difference is real but not huge. Your savings rate matters much more than trying to pick the perfect investments or time the market. (Again, you can use the calculator if you want to try your numbers.)
This finding is why I focus more on savings tips than investing tips. Still, we'll cover investments in detail later on.
Your Action Plan
Calculate your current savings rate: Take your annual savings and divide by your gross income. What percentage are you at?
Pick a target: Don't try to jump from 10% to 50% overnight. If you're at 10%, aim for 15%. If you're at 20%, try for 25%.
Track your progress: Calculate how many years you're shaving off your working life with each improvement. It's incredibly motivating.
Next Time: The Big Three Expenses (And How to Optimize Them)
Speaking of housing, transportation, and food, next week we'll dive deep into these three categories. I'll show you specific strategies for reducing each one without feeling like you're living in poverty.
Because here's the thing: every dollar you optimize in these areas doesn't just save you money once. It saves you money every year for the rest of your life.
Until then, your homework: Calculate your current savings rate and pick a target for next year. Don't worry about being perfect. Just start moving in the right direction.
The math is on your side. Now let's make it work for you.
Here's to working backwards from your dream life,
Max