What is Wrong with the Young Couple Savings Model

How much of your income do you save? The average young couple saves maybe somewhere between 5% and 20% of their after-tax income. Most of our peers feel this is the "right" amount to save since that is what society tells them and it appears to be the popular opinion culturally here in North America. Well, we have flash news for you: a 20% savings rate is crap. Even on the high end, at a 20% savings rate, you are signing up to work for 39 years, or until the age of 61 assuming you start working at age 22 and have no gaps in employment throughout the 39 years.

The average retirement age is 65 so you might think 61 is not too bad (you even managed to shave off 4 years), but how does it feel to be going to work and back every single day for 40 years? Assuming you work 40-hour weeks, that's almost 80,000 hours of your life just gone by, and that's not even accounting for all the commute time (easily 8-10 hours more per week), and the time it takes for you to get ready for work, put on makeup (for the ladies), to go shopping to purchase clothes for work, etc.

Is this how you'd like to spend the majority of your life? Is this worth all the doo-dads you purchase on Amazon everyday or every week? Is this worth the mega mansion with backyard you raise your family in? Well guess what, tons of people do this right now and they're basically forgotten. They don't create even the slightest dent in society.

The following graph shows the relationship between your savings rate, and how soon you can retire. Effectively, as your savings rate increases, the time needed to retire (and maintain the same lifestyle and cost of living) decreases exponentially. In other words, your savings rate is the single most important number that determines how soon you can stop going into work. Increase your savings rate by even 5% and watch those number of years at work dwindle substantially.

Mrs. FH and I have an aggressive 70% savings rate goal which means we'll be able to retire in just 9.6 years, or when we're 32 years old (young?). We can retire even sooner if we move to a cheaper cost of living place than where we are now. Learn how to maximize your savings rate by following our pro frugal hacking tips.

How quickly you reach financial independence (FI) is directly related to your savings rate. Assumptions: Starting at net worth of $0, 5% after-inflation returns, 4% withdrawal rate, only gains/appreciation used for income, principal is untouched, no after-inflation increases in spending or income over the years, cost of living is same both before and after retirement

Let's look at the same data in table form, this time including your age at retirement and hours of work you will have spent in total engaging in work-related activities (working, commuting, getting ready for work, etc.):

Assume you start working at the age of 22, right after graduation. This table shows how old you'll be by the time you can safely retire with a 4% withdrawal rate at various savings rates. Assume you spend 50 hours per week working and commuting, and work 49 weeks a year (i.e. 3 weeks of vacation a year). Even a 20% savings rate doesn't seem so amazing now, does it? You ought to be targeting a savings rate of at least 50%, ideally closer to 70%. Our own savings rate is currently at 71.2% this year.

Why does your savings rate matter so much?

Your savings rate is the single most important determinant in how quickly you'll be able to retire. Effectively, as your savings rate increases, the time needed to retire (and maintain the same lifestyle and cost of living) decreases exponentially. The retirement math is very sensitive to the savings rate for 2 very core reasons that you need to internalize:

  1. Your savings rate determines how much money you need now and in retirement to sustain yourself.
  2. Your savings rate also determines how much money you're putting away for your retirement month over month. It determines how quickly you can build your nest egg.

As you start to increase your savings rate, 3 magical things happen:

  1. The amount of money you need to sustain yourself right now reduces. You learn to stretch each dollar to its maximum and learn to live on less.
  2. This means the amount of money you need to sustain yourself in retirement also reduces, which means the size of your required nest egg (i.e. net worth) becomes smaller. The assumption is that you maintain the same lifestyle and cost of living in retirement that you do now. The math only works in your favor if you move someplace cheaper after retiring.
  3. The amount of money you're putting away each month and each year towards retirement increases as your savings rate increases. This means you're building your smaller nest egg even faster. You will have turbo-charged your retirement goal.

Take these 3 magical things into account, and even a modest 5% increase in savings rate allows you retire several years earlier. For instance, at a 10% savings rate, you would need to work for 53 years, but at a slightly higher 15% savings rate, you only need to work for 45 years! That's a massive difference of 8 years by just adjusting your savings rate by 5%! The funny thing is that a 5% savings rate boost can be so easily attained by just taking control of simple things in your life like your groceries and your Starbucks/coffee/breakfast expenses. Are these simple changes not easily worth 8 years of your life? Only you can answer that.

Ok I'm sold, what now?

Here are some solid ideas to implement in your own life if you plan on increasing your own savings rate so you can retire earlier:

  • Reduce your taxes by contributing to tax-deferred accounts like your 401(k) and your IRA
  • Downsize your apartment. You really don't need more than 450 sq. ft. per person
  • Get some roommates to split rent with
  • Start biking to work
  • Sell your car if possible by living closer to work and biking everywhere
  • Start shifting more of your grocery spend to Costco - 58% of our groceries come from Costco. Reduce your meat and alcohol intake
  • Reduce (or eliminate) partying, eating out, clubbing, drinking, smoking, etc. and all such luxuries
  • Be mindful of your travel expenses - don't travel during peak periods. Switch from hotels to Airbnbs
  • Reduce your Amazon purchases and other online shopping activities

These heavy-weight changes alone will probably spike your savings rate by 30-50%, easily allowing you to retire ~25-30 years earlier. But if you want an even higher savings rate, here's a detailed list of things we don't do that help us save 70%+ of our post-tax income. The more suggestions you adopt from this list, the faster you will get to retirement. It's just math.

Remember this: your retirement age isn't decided by how much you make, but rather only by your savings rate. You could be making $1 million a year, but if you're saving only 10% of that, you too have to work for 53 years if you want to retire maintaining the same cost of living.

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Is early retirement worth it for you to change a few things about your life? Or do you want to just keep working until you're 65, i.e. for 43 years, like everyone else? Let us know in the comments.

Mr. Frugal Hacker

San Francisco, CA

Born in India. Grew up in Dubai for 15 years. Studied and lived in Canada for 8 years. Backpacked in Europe for 2 months. Lived in Toronto for 1.5 years. Working in San Francisco for the past 4 years. Runner, cyclist, software engineer.