In previous posts I have talked about how we currently strive to save 50% of our after tax income and how important your savings rate is in building wealth rapidly. But after listening to the Radical Personal Finance Podcast, it made me realize that this may have not been enough to sway you. What I mean, is that this may need to be translated. It is very easy to conceptualize and visualize what a 50% savings rate means to in terms of dollars. But what does it mean in terms of Time Freedom?
What may not be as intuitive is what it means for your ability to reach financial independence. I had already previously internalized the fact that a 50% savings rate effectively meant that for every year of work, I would be banking a years’ worth of living expenses. But I hadn’t really thought much about what a higher savings rate (or lower one) translated to until now.
If you want to reach Financial Independence consider the following:
If you save 5% of your income, you can take 1 year off every time you work 19 years. [That is a lot of time to put in to bank 1 year of freedom]
If you save 10% of your income, you can take 1 year off every time you work 9 years.
If you save 20% of your income, you can take 1 year off every time you work 4 years.
If you save 30% of your income, you can take 1 year off every time you work 2 years and 4 months.
If you save 40% of your income, you can take 1 year off every time you work 1 years and 6 months.
If you save 50% of your income, you can take 1 year off every time you work 1 year. [Where the GYFG house is currently at. I could see us between 50-60% long-term]
If you save 60% of your income, you can take 1 year and 6 months off every time you work 1 year.
If you save 70% of your income, you can take 2 years and 4 months off every time you work 1 year.
If you save 80% of your income, you can take 4 years off every time you work 1 year.
If you save 90% of your income, you can take 9 years off every time you work 1 year. [This seems pretty out of reach and extreme to me. I want to be able to have $200K/year of living/travel/fun expenses. This would imply a $2M after tax income and likely a $4M gross income assuming a 50% tax rate]
There are a few assumptions that we should probably list based on what you see above:
- This doesn’t assume any growth of your money (i.e dividends, interest, appreciation, etc.)
- It is based on after tax income
- It also assumes living expenses remaining static (i.e no inflation, no reduction in expenses as you pay off your house, etc.)
- It also does not take into account any income from social security or outside pensions.
Nonetheless it is a very powerful representation of what each notch on the savings rate belt represents in your current standard of living.
Based on the podcast episode I mentioned above, one of the listeners took that information and created this really cool chart that visually shows you based on your current age and savings rate when you can expect to hit Financial Independence. This chart looks to include an assumption for growth and is assuming a 4% withdrawal rate once you reach retirement (which is supposedly the safe rate for a 30 year retirement). Obviously you will need to adjust if you plan to have a retirement of longer than 30 years. This is not the end all be all, but it gives you a good starting point.
Where are you on this chart? Does this help you internalize what your savings rate really means in terms of Time and Financial Freedom? Any other thoughts?
-Gen Y Finance Guy
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