Rate of Saving and Why it is Important

There has been a lot of buzz around your rate of saving lately, but what is it exactly? Your rate of saving is one of the key factors in determining how long it will take you to retire. It can be calculated by simply taking the amount you save (whether it is into a savings account, retirement fund or other savings vehicle) and dividing it by your after tax income.

By increasing your rate of saving, you can exponentially decrease the number of years until you can retire. Let’s take a look at how this works:

Early Retirement Grid

Let’s say you make $65,000 per year, after taxes, and have a rate of saving of 7.7% (spend $60,000 and save $5,000). If you look at the chart above, you can see that it would take 57 years to retire!

Now, let’s increase the amount saved each month. Let’s say you still make $65,000 per year, after taxes, but now save $35,000 and spend $30,000, increasing your rate of saving to 53.8%. Now you could retire in only 18 years!

Cutting your expenses to increase your rate of saving can be even more powerful than increasing your income. If you think about it, every $1 you cut from your expenses permanently decreases the amount you need to live on every month and increases how much you can save each month, thus having double the impact of simply saving a dollar more. The math is simple, the higher your rate of saving, the less time you have until retirement. In fact, if you could live on 35% of your after tax income, you could retire in 10 years! Now that’s a goal worth working towards.

For more information on raising your rate of saving, visit www.roguecu.org/learn.