The Most Important Factor for Retiring Sooner


If you’re serious about retiring sooner, you really should start with the basics. While there are gimmicks and schemes and so-called shortcuts you can try, none of them will compete with power of the basics. Retiring sooner boils to one most important factor: savings rate.

What Is Savings Rate?

A savings rate is the amount of money, expressed as a percentage or ratio, that a person deducts from his disposable personal income to set aside as a nest egg or for retirement. Disposable personal income is a somewhat deceiving term, in my opinion. Had you asked me sooner in life what I thought that meant, I would have told you that it was the amount of money I had left over after accounting for all my basic necessary expenses. At least I would have used the word “necessary,” so cut me some slack. The term technically means all your take-home income after taxes.

In fact, according the Federal Reserve, disposable income is all sources of income minus the tax you pay on it. Note that does not include a healthcare deduction or any other benefit deduction you might take from your job..

What the Fed tells us here is important in understanding this basic concept. Everything after taxes is disposable. You choose how you meet your needs, wants and whims. Don’t act like you are a victim. You are choosing your consumption even if you are at a minimum wage job. Perhaps your choices are fewer, but you have them. You choose.

What Is My Savings Rate?

So to calculate your savings rate, take the amount you bring home after taxes and divide it into the amount you are saving and investing. For instance if you bring home $20,000 after taxes and you save $2000, you’re savings rate is calculated as such: $2,000 divided by $20,000 = .1 or 10%. Your savings rate is 10% or 1:10 ($1 for every $10 made). This number is the key to your financial independence and can practically dropped into a formula to show how long it will take for you to be able to retire and have little worry about running out of money.

In the example we are using of $20,000 in disposable income and a savings rate of 10%, this person could potentially retire in about 52 years. So basically, if you’re savings rate is only 10% it will also take you 52 years! But you want to retire sooner, so what do you need to do? Cut your spending and save more. Also, figure out ways to make more, but don’t spend it. Save it.

Most of you aren’t in the category of only bringing home $20,000. Let’s be more reasonable. 2016 Census data showed that the median household income in the United States was $59,039. Some of you will be higher and some lower. A family of four could live well in the US on less than $30,000 a year in expenses.

Many will want to argue with me about the quality of life for this amount, but I know that many people are living well on even less. It’s about priorities, and if you really (and I mean really) want to retire sooner, you will have to work on yours. I will work on sharing some real life, documented examples for you. You will still likely flinch at the thought, but I promise it won’t be as bad as you think. A life on that budget will even be good. You just need to work on the way you think and consume.

Now Play It Out

If you use the numbers I suggested above, your savings rate is almost 50% and you can retire in less than 17 years while starting with no net worth. So that means you have zero in savings or equity and you could retire in 17 years with a 50% savings rate. If you start this in your mid-twenties, you are able to retire in your early to mid forties- a full twenty years earlier than most people!

There are assumptions to this formula. It assumes a 5% growth rate on your savings and investments. It assumes you will withdraw no more than 4% of your nest egg a year once retired. (Based on my latest research that withdrawal rate would have only run out of money in two instances of the market’s history if deductions started in those particular years. You can always adjust so you don’t run out.) It assumes you will continue living on less than $30,000 a year in retirement, adjusted for inflation. Meaning, you have the same spending power that comes with $30,000 today.

Maybe you envision spending more than $30,000 a year in retirement. I suppose that’s fine, but you will need to work longer to make the math work. In fact, you could work to make more and save more to keep the timeline the same.

Sure, there are lots of arguments in this debate. I’m not trying to get to those details here. I’m trying to show the basics of how this critical concept works and how you can retire sooner. Honestly, the minutiae of those arguments won’t matter that much once you catch on. If you can learn to think and live this way, you will develop and ability and resilience that will overcome the “what if” situations. While many may debate how much you will need in retirement, I haven’t met one that legitimately argues against the basic factor of the savings rate.

Overview of Savings Rate and Years to Retirement

I hope this will be a helpful visual. Based on some charts, I’ve written out the basics of how this plays out for each savings rate in increments of 5% below . The first number is the savings rate and the second is the number of years you will have to work until retirement. So in the first example, a 5% savings rate allows you retire in 66 years.


Of course, there are many other things that factor into the overall equation and getting to exactly how long it will take. If you already have some savings and investments, that should reduce your number of years. The list goes on, but you need to understand this concept as the foundation of your goal to retire sooner.

I hope you’re closer to the bottom of this list. If you aren’t, start working on lowering your expenses and increasing your savings rate. In fact, nothing will get you there faster.

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