How Much Do I Need to Save to Be Financially Independent?
When saving for financial independence, it’s helpful to just focus on your savings rate as a percentage of income to reach your goals. For example, a 25-year-old saving 30% annually should reach financial independence in about 24 years. See our table below.
The Challenge of Projecting Financial Independence
Here at Martin Money, I’ve spent a lot of time writing posts about how to achieve financial independence.
While we’re not what I would call a laser-focused “FIRE” site, giving people the tools they need to reach their own version of financial independence is certainly a primary theme for us.
The problem with addressing financial independence questions through a website is we’re forced to make generalized assumptions and can’t address specific scenarios.
And the thing about personal finance is it is exceptionally personal. No two circumstances are the same.
So, when someone asks a question like, “How much money do I need to retire?” it’s not as simple as just quoting a dollar amount.
$10MM would probably do it, but that’s not very useful information for the majority of readers who probably won’t obtain that level of wealth. It’s a bit of a lofty goal and they probably don’t need THAT much to be content anyway.
So, we write posts trying to target a large group of people based on their goals, ages, income, desired retirement age, etc., etc., and the data gets so broad it becomes difficult to use.
Ultimately though, financial independence boils down to two critical components:
- How much are you going to spend?
- Do you have enough money to cover that?
It doesn’t matter if you can live on $1,000 annually or need $1,000,000 to support your standard of living, it all comes back to very basic arithmetic.
Of course, as you attempt to set savings goals, how can you possibly know how much you’ll need years down the road?
So many things can happen in your personal life like changes with your family, living situation, health, career, and so on.
Then who can guess when Uncle Sam will force a sudden shift in tax policy or when the economy will jump the rails and toss all of your plans off to never-never land?
It would be helpful if we could remove some of this variability from the equation and just focus on how much we need to save today.
Simplifying The Process
When you boil it all down, as a saver working toward FI, you need to know how much you need to save today to have enough income to cover your living costs.
After all, today is the only day you can do anything about saving for tomorrow. And tomorrow is dependent on what you do today.
And if you had enough income from other assets to cover your cost of living now, you’d already be financially independent.
There is no point trying to factor in the infinite number of changes that could impact your personal financial situation because they’re impossible to predict.
So, let’s assume you just want to provide yourself with a nest egg of money that would sufficiently cover all of your living expenses at your current standard of living.
Since your current income should be doing just that, we can calculate what percentage of that income you need to save each year in order to replace it completely.
In other words, it’s possible to calculate how much you need to save now to confidently consider yourself financially independent.
Furthermore, we can project how changes to your saving rate can move your financial independence completion date sooner or later in life.
Percentage of Income Replaced (by Age and Savings Rate)
What follows is a projection of how long you will have to save a given percentage of your income in order to reach financial independence by a certain age assuming you begin at age 25.
You could also just consult the age column and subtract 25 from whatever number is there to convert it to the number of years you would have been saving up to that point.
For example, if you begin saving 30% of your income at age 25, your portfolio will be able to replace 102.9% of your income when you reach age 49.
| Percentage of Income Replaced by Age and Savings Rate | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Age | Safe Withdrawal Rate | Savings Rate | |||||||
| 10% | 20% | 30% | 40% | 50% | 60% | 70% | 80% | ||
| 25 | 2.00% | 0% | 0% | 1% | 1% | 1% | 1% | 1% | 2% |
| 26 | 2.05% | 0% | 1% | 1% | 2% | 2% | 3% | 3% | 4% |
| 27 | 2.10% | 1% | 1% | 2% | 3% | 4% | 4% | 5% | 6% |
| 28 | 2.15% | 1% | 2% | 3% | 4% | 5% | 6% | 7% | 9% |
| 29 | 2.20% | 1% | 3% | 4% | 6% | 7% | 9% | 10% | 12% |
| 30 | 2.25% | 2% | 4% | 6% | 7% | 9% | 11% | 13% | 15% |
| 31 | 2.30% | 2% | 5% | 7% | 9% | 12% | 14% | 17% | 19% |
| 32 | 2.35% | 3% | 6% | 9% | 12% | 15% | 17% | 20% | 23% |
| 33 | 2.40% | 4% | 7% | 11% | 14% | 18% | 21% | 25% | 28% |
| 34 | 2.45% | 4% | 8% | 13% | 17% | 21% | 25% | 30% | 34% |
| 35 | 2.50% | 5% | 10% | 15% | 20% | 25% | 30% | 35% | 40% |
| 36 | 2.55% | 6% | 12% | 18% | 24% | 30% | 36% | 41% | 47% |
| 37 | 2.60% | 7% | 14% | 21% | 28% | 35% | 42% | 49% | 55% |
| 38 | 2.65% | 8% | 16% | 24% | 32% | 40% | 48% | 56% | 65% |
| 39 | 2.70% | 9% | 19% | 28% | 37% | 47% | 56% | 65% | 75% |
| 40 | 2.75% | 11% | 22% | 32% | 43% | 54% | 65% | 75% | 86% |
| 41 | 2.80% | 12% | 25% | 37% | 49% | 62% | 74% | 87% | 99% |
| 42 | 2.85% | 14% | 28% | 42% | 57% | 71% | 85% | 99% | 113% |
| 43 | 2.90% | 16% | 32% | 48% | 65% | 81% | 97% | 113% | 129% |
| 44 | 2.95% | 18% | 37% | 55% | 74% | 92% | 110% | 129% | 147% |
| 45 | 3.00% | 21% | 42% | 63% | 84% | 105% | 126% | 146% | 167% |
| 46 | 3.05% | 24% | 47% | 71% | 95% | 119% | 142% | 166% | 190% |
| 47 | 3.10% | 27% | 54% | 81% | 107% | 134% | 161% | 188% | 215% |
| 48 | 3.15% | 30% | 61% | 91% | 122% | 152% | 182% | 213% | 243% |
| 49 | 3.20% | 34% | 69% | 103% | 137% | 172% | 206% | 240% | 274% |
| 50 | 3.25% | 39% | 77% | 116% | 155% | 193% | 232% | 271% | 309% |
| 51 | 3.30% | 44% | 87% | 131% | 174% | 218% | 261% | 305% | 349% |
| 52 | 3.35% | 49% | 98% | 147% | 196% | 245% | 294% | 343% | 392% |
| 53 | 3.40% | 55% | 110% | 165% | 220% | 275% | 331% | 386% | 441% |
| 54 | 3.45% | 62% | 124% | 186% | 248% | 309% | 371% | 433% | 495% |
| 55 | 3.50% | 69% | 139% | 208% | 278% | 347% | 417% | 486% | 555% |
| 56 | 3.55% | 78% | 156% | 234% | 311% | 389% | 467% | 545% | 623% |
| 57 | 3.60% | 87% | 175% | 262% | 349% | 436% | 524% | 611% | 698% |
| 58 | 3.65% | 98% | 195% | 293% | 391% | 489% | 586% | 684% | 782% |
| 59 | 3.70% | 109% | 219% | 328% | 437% | 547% | 656% | 766% | 875% |
| 60 | 3.75% | 122% | 245% | 367% | 489% | 612% | 734% | 856% | 979% |
| 61 | 3.80% | 137% | 274% | 410% | 547% | 684% | 821% | 957% | 1094% |
| 62 | 3.85% | 153% | 306% | 459% | 611% | 764% | 917% | 1070% | 1223% |
| 63 | 3.90% | 171% | 342% | 512% | 683% | 854% | 1025% | 1195% | 1366% |
| 64 | 3.95% | 191% | 381% | 572% | 763% | 953% | 1144% | 1335% | 1525% |
| 65 | 4.00% | 213% | 426% | 639% | 851% | 1064% | 1277% | 1490% | 1703% |
Here are some clarifications on how we calculated this information:
- We assumed an annual rate of return of 10%. Obviously, market forces will impact actual results.
- You’ll notice a column with the header “Safe Withdrawal Rate.” This is a generally accepted safe withdrawal rate based on current age and life expectancy. The numbers we use are pretty conservative.
- We did not factor in any changes in income because one’s standard of living tends to move up with income. In other words, we’re assuming your spending habits will follow your income and the proportion of spending from your income will remain steady.
If there’s one significant takeaway I had from this data it’s that if you have any ambitions for reaching financial independence early in life you have to get started with your saving ASAP.
We come back to it frequently, but there’s no substitute for the power of compounding interest over time.
I was also surprised by how long the data shows it would take someone saving 80% of their income to reach financial independence.
I suppose our conservative withdrawal rates may partially be to blame. The data is the data, but I’d bet one could reach financial independence much faster than 16 years at that savings rate.
Conclusion
This is a projection of course, but I hope it helps cut through some of the noise that gets pulled into the FI guessing game.
I recommend running lots and lots of projections from all sorts of angles to try and clarify your own financial independence picture.
Looking at it from different approaches gives you a lot of data points that can help you really understand what you need to prioritize and watch in order to meet your goals.
Here are a few posts we’ve written that may also be helpful:
