Does The “Perfect Save Rate” Exist? I Figured It Out

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The biggest money question we have is usually: How do I enjoy my life now and plan for enjoying it later? If we go too far in either direction, we’re sacrificing the quality of our lives at one point or another.

So does the “perfect” save rate exist that optimizes for both now and the future? And if so, what is the ideal percentage of our income to save that would work for most people, most of the time? Here’s the number I landed at, and why.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• Save Rate Spreadsheet [Make a copy!]: https://docs.google.com/spreadsheets/d/1rTlDhv2GGRUczBF_1W0PX_OCxKFNR9ZZp78EKpP2KTc/edit?usp=sharing

• Why Hitting “Half FI” is More Like 75%: https://moneywithkatie.com/blog/why-hitting-half-fi-is-more-like-75

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Katie: Welcome back to The Money with Katie Show, Rich Girls and Boys. Today’s gonna be a fun little mix of the philosophical and the tactical, which is my personal favorite. So let’s jump in with a really big question: How do I strike a balance between enjoying my life now and enjoying it later? That’s one of the biggest questions that we typically face in our money lives, right? And it’s why one of the largest challenges in personal finance is figuring out how much of your income you should be saving. It’s a question that drives at the heart of the dilemma of delayed gratification and living for the present moment. Because if you go too far in either direction, you’re either sacrificing your current happiness for the sake of your future self or vice versa. 

Now, I’m a born optimizer, which means I wanna know where I am going to get the absolute highest leverage results. So I was personally very curious if the “perfect save rate” existed, because while I know there might be an ideal answer for each individual—and personal finance is personal—we know that, right? But I figured there was probably a good chance that there was some number out there, some ideal percentage of your income to save that would represent that top of the bell curve, a percentage that would work for most people most of the time to get them to a place where they can comfortably cut back on work or stop working entirely and live off their savings.

The methodology that I’m using today to determine your “freedom number” is threefold. So first, I gotta figure out how save rates translate to years until retirement. So in order to do this, to figure it out, I whipped out a blank Google sheet. I started playing around with different incomes, and it took me longer than I’d like to admit to realize that, because we’re talking about percentages, it actually doesn’t matter how much you make. The answers are all proportional. So on my third income try, I was like, “Oh, these are all the same.” Okay, yeah, duh, Katie. But your save rate is the only thing we need to know in order to solve for N, which is the number of years between you and your freedom number. This is because if I know your save rate, that means I also know your spend rate, right? They’re just two sides of the same coin. And if I know your spend rate, I know what your freedom number is, assuming we are going to use the 4% safe withdrawal rate in retirement. 

Now, once we nail down these percentages, it’s actually relatively simple to figure out how many years of investing your savings it’ll require to hit that freedom number that can support your spending. For example, someone who earns a hundred thousand dollars and someone who earns $50,000 will reach their own relative retirement numbers in 26 years if they both have a 25% save rate.

Secondly, I wanted to figure out if there’s any statistically significant time in a human lifespan or career when someone is most likely to want to make a major career or lifestyle change that would impact their ability to earn money. So when I’m asking this question, “What is the ideal save rate?”, what I’m really looking for is, what savings rate is going to get us to that point in our lives with the maximum amount of optionality without making our life in the present measurably worse? That is a very important piece of this. So it would be helpful to know when someone’s most likely to want to disrupt their income by switching careers or downshifting for whatever reason, or maybe even retiring altogether.

And lastly, we have to acknowledge that we benefit tremendously from compounding as our nest egg balloons, which means it might take you 20 years to be financially free, but the first half is gonna be a much longer slog than the second half. So we’ll get to that today too, and how it impacts how we think about these timelines. But remember, this is completely a variable that’s working on your side. My theory is that there is a point at which saving additional income does not meaningfully impact your future happiness, but it does begin to negatively impact your present happiness. So ideally, we wanna walk right up to that point and then stop short of it. So we’ll start unpacking all of this after a quick break. 

So let’s unpack part one: how your save rate determines your timeline. Because as I noted, the amount of time it takes to reach your freedom number across save rates is static across incomes, because it is all proportional. So the more you save, the less you’re spending, and the less you need to invest to support your lower expenses. And here we are assuming an average real rate of return of 7% per year. It’s also worth stating explicitly that you’ll wanna get your income to a point where the save rate does not feel unsustainable.

So this might be obvious, but to extend our earlier example, it is much easier for someone who earns $100,000 per year to save 25% of their income than someone who earns $50,000 per year. They may have the same timelines to retirement, but that former person earning twice as much money is gonna have an easier time, because the remaining 75% of their income that they get to spend is just higher. This is important because the freedom number that you’re saving toward is only going to be able to support your existing spending habits. I will say that again: The freedom number that you are saving toward is only going to be able to support your existing spending habits. It is able to sustain that same level of spending. So sustainability in the long term matters. 

So when I ran these numbers, this is what I found, and we will link the spreadsheet for you in the show notes. But if you save 10% of your income, you will hit your freedom number after 41 years. Now, this is pretty simpatico with normal save rate suggestions and traditional career lengths, but increasing that rate from saving 10% to saving 15% makes a really large difference. So get this: You go from reaching it in 41 years to 34 years. So you shave seven whole years off the timeline with a single five percentage point increase in your savings. Now, going from a 15% save rate to 20%? That shaves off another four years, and now you’ll reach your freedom number after 30 years, not 34. A 25% save rate will require a 26-year career to deliver you to freedom. 30% takes 23 years; 35% will take 21. And if you get up to 40%, now you’re under 20: You have to work for 18 years. Finally, a 50% save rate, you save half your income, that means it’s gonna take you 14 years to go from zero to freedom. By the time you eclipse like a 70% save rate, you would be able to retire or have the ultimate flexibility, whether that’s to change careers, take a sabbatical, what have you, after just eight years. 

So you may have noticed, as I was rattling off all the rates and timelines, that as the save rate increased, the relative impact of the increases actually diminished. So when you were going from 10% to 15%, your change rate’s impact was equivalent to seven years removed from the timeline. When you went from 65% to 70%, it only shaved one year off the timeline.

So this exercise shows us that not all save rate increases are created equal, and that is gonna be key here for us nailing down the ideal save rate. Another thing that it highlights is that the lower your existing save rate, the more your increase is going to impact your timeline. 

Now, depending on how much you earn, at some point in that ratcheting up of your annual savings, you’re probably going to reach a point that is not actually enjoyable or sustainable. For example, a 70% save rate on a $500,000 income still means you can basically buy whatever you want, which is fantastic, but a 70% save rate on $60,000 per year? I’m gonna be honest. I know very, very few people who don’t live in vans that are capable of surviving happily on $18,000 per year. So again, this example tells us that there’s probably a range we can isolate where we are going to capture the most juice for that savings squeeze, a point beyond which any incremental savings are not really meaningfully moving the needle. 

This also highlights why investing your energy in earning more is almost always going to go further than trying to eke out another percentage point by canceling another subscription, right? Even just a few high-earning years at a 50% save rate can be enough to set you up for life. So that’s a little footnote for later. 

Okay, so onto our experiment’s second question: Why and when do people typically want to make career or lifestyle changes? The research here was pretty unsurprising to me, but the most common reasons that people wanna make big changes in their lives fall into a few major categories. The first is that you have some major life event. So think a birth, a death, an accident, a windfall. That was a roller coaster; we’re all over the place today. That causes you to reassess your priorities and the direction your life is headed. It’s that moment where you’re like, “Hold on, what am I doing? I gotta make a change.” The second reason is that you reach a certain point in your career and realize that you’d rather change course, you might wanna do something else, which can lead to some financial uncertainty. And the third is that you just for whatever reason decide you’re done with income-producing labor, which is super fun, either temporarily or permanently, and you are like, “Hey, I wanna take a step back. I need to take some time for myself. Not sure if this whole work thing is for me.” So according to Zippia, the average age when someone makes a major career change is 39. Now obviously we don’t know what the ideal age would be; we just know that that’s when people typically do. So we’re going to use that as our upper bound. And in the US in 2022, the average age when a woman had their first child was 30. But there are other factors that influence that, like education level and geography. So we’re just gonna use that as our lower bound. And I’m deducing from these two facts that big changes in income-producing activity first occur probably somewhere between ages 30 and 39, or at 34 and a half if we wanna split the difference. So we’re gonna round down to 34 to play it just a little bit safe. 

Now, this tidbit is important because it’s gonna tell us the midpoint age at which it’s going to be most impactful for you to have established financial habits that are going to lead to financial freedom. Maybe you haven’t attained financial freedom yet. We’re not trying to become financially free by 34, but we just want a substantial amount of optionality at that point. But we know that this wider range of years, 30 to 39, probably represents the time where money is going to go the furthest for you in terms of shaping your future outcomes, where it’s gonna have the high-leverage impact that we discussed earlier. 

So if we assume you begin work at age 21, that puts the midpoint of our range, age 34, at right around 13 years. Now, which save rate allows you to reach total financial freedom in just 13 years? The answer is 55%. And hey, total financial freedom, that’s great. We will take that. If you make enough money to save 55% of your income, that would be fantastic. But we know for most of us, a few other things are true. High save rates are harder to achieve earlier in life because our incomes are typically not super high when we’re 21 years old. We also know that we do reach diminishing marginal returns long before we hit a save rate of 55%. So we’re probably gonna wanna walk that back a little bit. And last but not least, we know that we don’t need total financial freedom in order for money to buy us solid optionality. We just need some. So what if instead, by year 13, we just aimed to be halfway there? Because thanks to compounding, the halfway point is actually closer to 75% of the way to the end.

And I always like to relate it to a snowball rolling down a hill, because at the top, when you’re just starting to pack snow onto that thing, your little tiny fledgling snowball is not gonna pick up much speed on its own. It’s really relying on you to push it. but before you know it, it’s gonna have enough snow packed on that the weight of its own little snowball body is gonna be driving most of that accumulation and speed. So regardless of how much snow you’re managing to pack on top of it as you go, that thing is going. We have a blog post on this exact phenomenon that we’ll link in the show notes, and we’re gonna come right back to this slippery metaphor after a quick break.

So back to the metaphor. I actually have not quite worked out the physics of how someone would physically add snow to a snowball while it is rolling, but I think the analogy stands. So for example, let’s use our $100,000 income. With a post-tax save rate of about 35%, it takes 18 years of investing for this person to go from “I have $0 invested” to “I am halfway to financial freedom,” or to build up a nest egg of about $1.5 million with their ultimate goal of $3 million. But, and this is the crazy thing, it’s only gonna take six years to go the rest of the way, to double our money from $1.5 million to $3 million by year 24, compared to the 18 years it took for the first half.

So for the fellow nerds in the audience, this is assuming annual 3% increases in income, a 9% average annualized rate of return before inflation, which is consistent with historical averages, and spending increasing by 4% per year, with an 18% effective tax rate. 

So what if we could go back to our breakdown of save rates and timelines and try to identify the point at which our diminishing marginal returns kick in most meaningfully, where, say adding another five percentage points only gives us like a year or two back? Through this lens, we land on 40%, and again, we will link to the spreadsheet so you can visually see this, but at 40%, we’d be totally financially free after just 18 years. And any additional increases would only shave off two years, at the most. 

A couple more reasons I like 40%: It means you’re still spending 60% of your income. And if we revisit our “most statistically likely to make a major career change at age 39” framework, the 18-year timeline squares pretty perfectly with someone who begins their career in saving at age 21. This means that at age 39, you’d be free to make a major change because you would technically actually be able to retire altogether. So that’s great. 

Now, many of us are not 21 years old. We can’t go back in time, right? 40% might be the number where you’re hitting that maximum bang for your buck point, but it might make things a little bit too tight. So I wanted to know if there was a save rate that would just walk that back a little bit to allow for more freedom today, or even saving for other financial goals today. One that still allows us to hit the “halfway to financial independence” point after 13 years, when we may start to feel as though we want more optionality. And 35% appears to be a very solid compromise, because at 35%, carrying forward all the same assumptions and parameters that I noted earlier (though, remember, it is all proportional, so you should be able to apply this to any income and get the same results), you would be fully financially free after between 21 and 22 years, with $2.6 million and a 4% safe withdrawal rate of about $106,000 per year.

But, and here’s the key, you’d hit halfway to financial independence with $1.3 million around year 16. So a little further out than the 13 we were shooting for, but a good, happy medium. 

So let’s chat through a few caveats. The first is something that we’ve kind of mentioned, but I wanna dig a little bit deeper, which is that most people do not begin earning enough money to save this much at age 21. So this example is truly the optimal blue sky version, but remember, when you start is irrelevant to the number of total years it takes. Starting earlier just means you’re gonna complete the timeline earlier in life. For example, if someone who begins earning $100k at 21 starts right away with a 35% or 40% save rate and someone else does the same thing at age 41, it’s going to take both of them 20 years. The only difference is that the 21-year-old is gonna finish at age 41, and the 41-year-old will finish at age 61. 

Number two is that most people don’t earn the same amount of money over their entire careers. So you may find yourself really hopping around on the save rate chart, depending on how much you’re making, which can speed up or slow down your progress. Now, this is probably more reflective of how this works in real life, the pesky real life outside the Google sheet, since someone might not save at all in their twenties, then decide, “Hey, I’m really gonna kick it into gear in my thirties and forties; I’m gonna hit a super high save rate to make up for lost time.”

So for a more specific timeline, based on what you have already invested and your own parameters, every Money with Katie Wealth Planner has a Financial Independence tab built into it that’s going to use your actual numbers. And so we’ll link that in the description if you’re curious. 

Number three is that taxes do make this scenario a bit trickier, because most people don’t think of their net annual income as their income. They think about their gross salary as their income. But if you wanna be really precise, try to use all post-tax figures and remember that investing in tax-deferred accounts can help lower your tax liability. So an easy way to do this, and what I like to do, is look at this from a monthly basis and just assess the number that is physically in the checking account, hitting the checking account every month, and go, okay, I wanna save X percent of this. That’ll ensure that you are hitting the correct post-tax number without involving a lot of complicated math. 

And the last caveat I wanna mention is that most people that are listening to this are probably not starting from $0 invested. And that’s what these timelines assume. It’s the time to go from $0 to total financial freedom. So it can be challenging to know exactly where your specific progress maps onto this timeline based on your existing investments without using more sophisticated projections. Now, again, this is why I like to use the Financial Independence tab in my Wealth Planner when I’m calculating my own numbers and trying to gauge how a different save rate or a new expense is gonna change things, because it takes my real net worth and income and spending into account in real time to show me how those decisions are impacting the future.

But I will say that after doing this exercise, I think if you want to strike a balance between enjoying your life now and also giving yourself the maximum flexibility later, and you wanna stop just short of diminishing returns, I think the ideal save rate is somewhere between 35% and 40% of your net income. So depending on how much you already earn and your expenses, that might be relatively easy to do with a few tweaks. Or maybe it’s a reminder that focusing on increasing your income or cutting back on your expenses, whichever path makes the most sense based on where you are, might be the right place to focus your energy next. 

All right, y’all, that is it for this week. I’ll see you next week, same time, same place, on The Money with Katie Show. And hey, if you feel like you’ve found the perfect save rate for you, shoot us an email at moneywithkatie@morningbrew.com. I’d actually love to hear how this compares to your anecdotal experience. We love that. So our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and all additional fact checking comes from Kate Brandt.