When Savings Rate Becomes Useless

In the pursuit of financial independence, tracking your numbers is one of the most important habits you can get into. Great numbers to keep track of include income, spending, debt, net worth, and more. Each item helps you stay on track towards your goals, see progress in real time, and project into the future what your financial situation might look like.

One of the most powerful tools for ball-parking a potential FI date is savings rate, so it’s no surprise that it comes up often. Savings rate even sits at the heart of one of the most popular FI blog posts of all time: The Shockingly Simple Math Behind Early Retirement. There’s even a useful chart that maps savings rate (in every 5% increment) to the number of years to FI!

However, even if savings rate is one of the best universal metrics of the FI world, it’s not without its own set of flaws. In order to map a single % to an estimate of years to FI, it has many baked in assumptions that can break down depending on your own unique situation.

Below, I’ll dive into a few of those assumptions, how to work around them in your own calculations, and suggest an alternative that can work better than savings rate for most.

First, How To Calculate Savings Rate

I’m not one to reinvent the wheel, so I’m going to direct you to the best post I’ve found on calculating savings rate: Big ERN’s You want to know our savings rate? Which one?

I recommend reading the entire article to wrap your head around what savings rate really means, but here are the essentials:

  • Ignore taxes, focus on net pay
  • Add savings that don’t make it to your paycheck (401k, HSA, employer matches, etc.) to both sides of the calculation
  • The principal portion of debt payments count as savings

Assumptions Galore!

Once you calculate your own savings rate, it should be a simple lookup to find out how many more years until financial independence. Note the emphasis on “should”…

The above table is only useful if you also meet all of these requirements:

  • Current net worth is exactly $0
  • Income and spending won’t change during the journey to FI
  • Post-FI spending will match current spending exactly
  • Investment returns are ~5%
  • A 4% withdrawal rate

It would be very difficult to find someone that fits every one of these assumptions! Not to mention the investment returns are mostly out of your control and impossible to predict into the future.

Plus, as soon as some money is saved away, the number of years remaining will be less than the chart shows, but it’s not simple to find out how much.

As long as you roughly fit most of the assumptions above, the lookup table can still be useful to get a ballpark estimate, but over time a more dynamic calculation will be much better.

I enjoy using Networthify’s calculator to ballpark our own timeline to FI because it can take into account existing investments, but it is unfortunately plagued by some of the same problems as savings rate.

Pre-FI Life ≠ Post-FI Life

One of the largest hurdles to overcome when estimating time to FI is that spending will most likely change over time. This is a significant obstacle for us personally because we don’t pretend to know what our lives will look like 5, 10, or even 30+ years from now!

Living in new locations, having kids, taking up new hobbies, and many many more spending variables make it very difficult to pick a “FI number”, let alone estimate when we would get there.

Even for someone with it all figured out, there’s a decent chance that spending in early retirement won’t match up exactly with their current working life. Work can come with expenses such as commuting, clothing, licenses, and more that will go away in early retirement. Additionally, a lack of work adds a lot of extra time to an average day and how someone spends that time can add (or even subtract) various expenses.

Luckily, there is a simple solution for someone that has picked out their FI number:

Focus on Savings as a $ Amount, not a %

Savings rate can be great for estimates early on and provides a sort of universal benchmark to let people from all income brackets discuss saving money, but at the end of the day, only the actual $ amount of savings matters.

Let’s imagine someone that has designed their post-FI life, determined how much it will cost, and decided what withdrawal rate they feel comfortable with. By simply dividing those last two numbers (annual spending / withdrawal rate), we have a target amount of investments (aka FI number) that gives them the freedom to walk away from work.

How long it takes to get there is determined by dollars saved, not by a savings rate percentage.

Let’s look at a quick example that emphasizes this point:

A High Cost of Living Opportunity

Let’s examine a hypothetical situation for my hypothetical friend Larry.

Larry has picked out his perfect retirement location in the mountains and knows that he can live a very comfortable life there for $40,000 per year. Unfortunately, there aren’t any jobs in that area that fit his area of expertise, so he’s choosing to wait until reaching financial independence to make the move.

Larry has already saved away half a million dollars and feels comfortable with a 3.5% withdrawal rate in early retirement. Therefore he’s well on his way to his goal FI number of $1.15 million dollars.

At his current job in a lower cost of living area, Larry is making $60,000 after taxes and is spending $25,000 per year for a very respectable savings rate of ~60% or $35,000 per year.

Larry is also considering a new job opportunity across the country in a much higher cost of living area. He estimates his spending needs will double to $50,000, while his take-home pay will only rise ~60% to $95,000.

Larry will be making more money, but his savings rate will drop to under 50%! Which job gets him to his early retirement dream in the mountains first?

If you’ve been paying attention, you probably chose the new job in the higher cost of living area! Despite Larry’s savings rate dropping over 10%, his savings amount increases by $10k per year. That $10k difference in annual savings will get him to the mountains an entire year earlier!

As with most decisions in life, they shouldn’t be made 100% based on money, but assuming Larry would be equally happy at either job, moving to the higher cost of living area can help him reach FI faster.

Hopefully, this example helps you understand why savings rate shouldn’t be the primary thing you optimize on your journey to FI.

Hacking the Networthify Calculator

As I mentioned above, the Networthify retirement calculator is a useful tool for estimating time to FI. However, using all of the input fields as intended makes it impossible to estimate time to FI in the common scenario of current expenses not matching expected post-retirement expenses.

Luckily, we can overcome this flaw and still get an estimated time to FI without building out our own complex projection spreadsheets (although that can be fun too!).

In order to get your estimated time to FI, replace current expenses with your expected FI expenses and adjust annual income to equal current savings + future spending:

After that small adjustment, the resulting years to FI should be a good estimate for your specific situation. Don’t worry that input annual income doesn’t match your real income or what the savings rate field says.

Annual expenses and withdrawal rate set your savings target while your current portfolio and annual savings determine the time to get there.

As you may have gathered by this point, savings rate just isn’t that important!


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