Last week I posted an introspective report on my own personal savings rate… and ended up on the low side of the savings scale, compared to our commenters! The top comment of that piece, however, has to be awarded to reader Greg, who linked us to this perspective-altering savings rate piece on Mr. Money Mustache’s blog. So, today let’s discuss… what is the best savings rate for your retirement (or financial independence) plans?

(Editor: We’ve since added an ideal savings rate calculator so you can try to figure out the best savings rate to use for your retirement and financial independence planning!)

**It’s All A Matter of Your Point of View**

It’s funny, isn’t it? We have all sorts of guidelines we follow – don’t pay more than a certain portion of your earnings towards housing, don’t eat more than a fixed amount of calories a day, work out some number of days a week – but there really isn’t any sort of hard guideline on how much money you should save towards your (you pick…) retirement or financial independence.

In MMM’s post, he hosts a graph from [amazon-product text=”Early Retirement Extreme” type=”text”]145360121X[/amazon-product] by Jacob Lund Fisker which shows the numbers of years you would need to work to retire comfortably (defined as a 4% withdrawal rate) with various rates of savings and investment returns. A very interesting graph, to be sure – but I’d like to try to simplify the graph a bit. Let’s look at a basic equation:

‘Years Saved For’ Based on a Savings Rate x: 1/((1-x)/x)

I don’t expect some of you to care to do any math, so I also graphed his take on the best savings rate:

So, what point exactly am I making? In ignoring investment returns, I’m strictly graphing how long one can live – at some spending rate – off the savings accrued in that year. To take a random example, say you save 30% of your post tax earnings. That means you are spending 70% – and 30% buys you .429 years of living at your current rate (let’s call it 5 months).

**The Utility Of Information on the Best Savings Rate…**

I don’t think it’s realistic to ignore investment returns in any long term burn rate calculations, but as an instructional (and perhaps motivational) tool, it’s interesting to look at how long you can sustain yourself with your current choice of savings rates. Any real analysis would try to look at it from the perspective of a safe withdrawal rate and assume some investment return – unless, of course, this was Japan of last century.

Anyway, check out your worst case burn rate based on your current savings rate – and note that things get funky as you approach a 100% savings rates (yes, if you aren’t spending any of your earnings, you saved for an undefined amount of time).

*What do you think the best savings rate is? Is this perspective at all useful, or was it just an excuse to draw a graph going up and to the right?*

Krantcents says

I think a good place to start would be 10%. If you start with 10% in your early twenties and stay consistent, you will be fine. You can always increase it. I used to increase my savings every time I received an increase in pay. I saved at least half of every increase.

PK says

I can see the beauty of the decade mark – for some low information younger folks, they just want to set a number and maybe revisit it later. 10% would be perfect for that.

Yakezie says

I really hope people can shoot for 50% of their after tax income. 10% is really a drop in the bucket.

PK says

From a “better than the Joneses” perspective, it’s not horrible – witness Fidelity’s guidelines, for what it’s worth.

Still, I’d hope he or she would increase it in the future when more cash was available – 10% for a whole career relies on a lot of appreciation (and chasing appreciation is no panacea!).

Financial Independence says

Thank you for the link on the Japan. It is certainly most enlightening. I think as population is growing older in the developed world we are bound for the age of low returns and high inflation.

Just look at the western Europe…

To be brutally honest I asked the question myself last year : http://www.niterainbow.com/search/label/Inflation

With the after tax budget of $60K and savings of $40K it will take me between 25-35 years to reach financial independence, i.e. at normal retirement age.

This is considering consistent, like clockwork savings. So I am preparing myself for the long long marathon.

Paul says

Planning your own retirement is like planning on how to build a successful company.

Or at least this is how I see it. If we plan it accordingly, then the return on investment (ROI) will definitely be satisfactory. As it is in life. Even though you might be 30 right now, you have to do something about the years that will come, when your physical and mental abilities would drop on lower levels.

The problem is that a significant percent of people are so focused on their savings rates that they totally ignore or forget about their retirement.

PK says

Hey Paul, I thought you might be interested in this article, financial literacy by age. It shows that decline in facilities you speak of pretty nicely!

On your second comment – that may be so, but having a massive savings rate certainly gives you a head start. If you saved a lot of money and stuck it in, say, a S&P 500 fund? You’d be a lot better off than most of your neighbors…