Savings Rate (Part 2): The Power of Your Rate
And what that rate is doing for you
There’s a common way of showing the power of compounding: a single dollar saved young can grow to something like $88 by the time you retire, depending on the assumptions used. It’s a big part of why “start early” gets repeated so often.
Time is doing the heavy lifting there, and time is one of the most powerful forces in any financial plan. The catch is that you don’t fully control it. You can’t reclaim the years before you started, and choosing to retire earlier shortens the runway rather than extending it. Most of your time is already set by when you began and when you want to stop.
Your savings rate is different. It’s just as powerful, and unlike time, it’s a lever you can still pull at almost any age. Part 1 looked at where the conventional 10-15% guidance came from and who it fits. This post is about the lever itself, and how to read what it’s doing for you.
Think about how a working life tends to unfold. You might start with debt to pay down and an income well below what you’ll earn later. Then the bigger expenses arrive: housing, family, repairs and emergencies.
Retirement savings gets pushed back, then pushed back again. For a lot of people, the early years simply don’t allow much. That’s exactly why the savings rate carries so much weight. It’s the input you can adjust once your situation allows it, at almost any age.
Working Both Sides at Once
By now you’ve hopefully found a recurring gap between what you earn and what you spend. That gap is your maximum possible savings rate, the ceiling on what you could set aside. What you save is a choice you still have to make. The gap only becomes a savings rate once you direct it toward the future instead of letting it sit or spending it elsewhere.
Once you’re saving it, that rate does more than any other input you control to determine whether and when you can stop working.
What makes it so powerful is that it works on both sides of the equation at the same time.
Every dollar you save gets time to grow, and as the opening showed, time does extraordinary things to a dollar.
Then there’s the other side. The more you save, the less you’re living on. And the less you live on, the smaller the pile you need before you can walk away.
A higher savings rate lowers the target at the same moment it speeds you toward it.
What That Looks Like in Dollars
Say your gross income is $80,000 and you save 10% of it. You’re setting aside $8,000 and living on $72,000. If you expect similar spending in retirement, you’ll be funding roughly that $72,000, 90% of gross income. Using the common benchmark of 25 times your annual spending, your FI number is $1.8 million.
Now raise the rate to 15%. You’re saving $12,000 a year instead of $8,000, and you’re living on $68,000, 85% of gross income. You’re putting more away each year, and your FI number falls to $1.7 million, because you’ve shown you can live on less.
Saving more fills the bucket faster. It also shrinks the bucket you’re trying to fill. The same five-point raise did both jobs at once, which is the whole reason this lever matters as much as it does.
Find Your Own Savings Rate
You may already know your savings rate or have a vague idea. If you haven’t calculated it recently or want to make sure what you think you’re saving is right, use the Savings Rate Calculator. It will help identify your current rate, including employer matches and other retirement contributions.
Most people couldn’t tell you their savings rate. Even fewer know what it’s buying them.
The number itself isn’t good or bad. It’s just an important step in seeing where you are, before figuring out if you need to adjust. A 10% savings rate might be exactly right for someone planning to work into their 60s. The same rate could limit someone hoping to leave full-time work by 55.
Every savings rate buys a different timeline. The question is whether yours is buying the one you want.
See What That Rate Buys
Now that you know your current savings rate, you can see if it aligns with the timeline you want. Open the FI Timeline tool and see for yourself.
It takes your age, gross income, savings rate, and what you’ve already saved, and shows roughly how long until financial independence (FI), where work becomes optional.
To keep the calculation simple and consistent, the tool does not include Social Security benefits. For many people, those benefits could meaningfully shorten the timeline shown.
Closing the Gap
If the tool shows a disparity between where you are and where you want to be, there are a few places to look.
You can raise your rate, saving a larger share of what you earn. That’s the lever this post has been about.
You can earn more, allowing the same savings rate to carry more weight.
You can move your timeline, accepting a later date and longer runway to grow your portfolio.
You can reconsider your target, asking honestly what kind of retirement you’re funding, and whether it needs to cost as much as you’ve assumed.
Which ones make sense for you depends on what you’re not willing to give up, and that’s not something a formula can tell you.
What Comes Next
Once you have a pace and a rough idea of where it's taking you, the next question is how simple or complicated you want the rest of it to be. More accounts, more strategies, more moving parts can all earn their place, but each one asks something of you in return.
If you haven’t checked out the FI Tools page on my site, please do. That’s where I’ll share free and interactive tools, like the two in this post. These tools are meant to help you work through your own FI equation and make clearer decisions with it. I’ll continue to build out additional tools, so keep checking back.
And you can always email me at brad@thefiequation.com if you have ideas or suggestions to improve any of the tools or content for the site.
— Brad
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This is meant to help you think through financial decisions and tradeoffs—not tell you exactly what to do. It’s general in nature and not personalized advice (see full disclaimer).