Stuff Our Parents Never Taught Us, Part IV: Savings Rate

Stuff Our Parents Never Taught Us, Part IV: Savings Rate

In the bi-weekly Stuff Our Parents Never Taught Us series I will introduce and clarify basic financial concepts in an attempt to increase the level of financial literacy among my Millennial peers. For some bizar reason, the majority of our parents didn’t think it necessary to teach us the 101 course of personal finance. If you’re over 18 and have no idea what stocks and bonds are, or how interest rates and dividends work, this is for you!


The first three parts of this series focussed on compounding interest, inflation and the 4% rule. If you’ve read those posts it should be clear to you by now that you should invest often and early on in your life to take advantage of the magic of compounding interest and to offset the effect of inflation eating away at your nest egg, from which you can safely withdraw 4% of capital each year after reaching your retirement goal.

Dr. Evil's famous One Million Dollar momentWhat you don’t know yet is how long it will take you to get there! Say you want to leisurely retire on €40,000 every year, which is rather high when you’re living a frugal lifestyle, but not too extreme either depending on your personal situation. Applying the 4% rule to €40,000 requires you to build a retirement fund of €1,000,000.

Whoa there, Mr. Evil. One million euros sounds like it will take a very long time or is even completely out of reach. It is and it isn’t. Enter the savings rate.


The logic

Imagine you earn nothing at all, live off berries you find in the woods and sleep in a mouldy yet cozy cave. You’ll be financially independent, retired or free – whatever you want to call it – from day one. Since you spend €0 to maintain yourself, you’ll need an investment portfolio of exactly 25 times zero to apply the 4% safe withdrawal rate.

Now imagine you are the CEO of a Fortune 500 company, make 10 million euros every year and live a luxurious life that costs approximately 10 million euros on a yearly basis. Even though you live in the biggest and nicest house in town, you’ll never be able to stop working since your portfolio is worth an abysmal €0 instead of the necessary 250 million euros.

Even though both examples have a net worth of exactly nothing and nada, person one enjoys a worry-free retirement, while person two will never be able to sustain his current lifestyle without continuing to work.


The math

Living on €0 is, of course, just as implausible as the fact that you take home a €10,000,000 salary. But the above logic gives us a clear idea on how the math behind saving works. If you spend everything you’ll never be able to quit your job. Conversely, you’ll instantly be able to retire when you don’t spend anything at all.

Let’s take the example of someone who makes €25,000 after taxes, follows the average Belgian savings rate of almost 10%, has a 5% return on his investments after inflation, and plans to apply the 4% rule when he retires. It will take that Belgian 51.4 years to grow his portfolio to a retirement-worthy nest egg.

That’s over six years longer than the standard retirement age in Belgium!

For the average Canadian (5% savings rate) building a retirement portfolio would take over 65 years. A US citizen (4.1%) following the advice of his peers needs almost 70 years. Swiss retirees (13.1%), the most avid savers of the OECD countries, also need to work well past their sixtieth birthday to comfortably quit their jobs at  45.4 years.

Math never lies of course, which you can check out for yourself with the retirement calculator. The table below gives the years until financial independence based on the 5% return on investments after inflation and the 4% withdrawal rate taken in the examples above.

Savings rate (%) Years Until Retirement
0 Infinite
10 51.4
20 36.7
30 28.0
40 21.6
50 16.6
60 12.4
70 8.8
80 5.6
90 2.7
100 0


The conclusion

Save as much as you can! It’s not about how much you make or how well you do on the stock market, but how much you pocket every month.

Even though I wrote about how the highest income tax in the west impacts reaching financial independence, the truth is that it doesn’t really. Yes, you’ll earn less because of your higher contribution to society, but financial freedom is not about earning more. It’s about balancing your income and spending.

If Mr. Evil needs his one million euros to retire within a 20-year time frame on a €40,000 budget every year, he better earn at least €80,000 to hover around a 50% savings rate. Otherwise he’s not going to make it.

Saving that much sounds like a chore or like you have to make a lot of sacrifices, but the truth is that a lot of personal finance bloggers have savings rates well above 50% without losing out. Will saves over 85% of his income. The Frugalwoods keep 82% of what they make. Jason from Dividend Mantra manages to save almost 60% of his income, even after quiting his full-time job. Kipp normally doesn’t spend around 65% of his paycheck. I can go on, and on.

Of course, saving or frugality shouldn’t be a goal in and of itself, but a way to improve the quality of your life, both now and in the future. Time is money, which means money can buy you time. If you save enough of your money, it will allow you to buy time by retiring early.

That’s why I aim to save and invest at least 50% of my paycheck on average. Knowing I’ll be financially free in about sixteen years is the best and most liberating feeling in the entire world. I’ll literally be able to do anything I want, whenever I want.

Which savings rate do you aim for and why?


  1. I’m aiming for a 50% savings rate, but it’s combined with overpaying our mortgage. We could do better though, so it’s something that needs looking at! Great post 🙂

    1. (Over)paying your mortgage is considered to be saving by a lot of people, at least in Belgium, so you’re doing great!

      If you feel like you could do better without any sacrife you should definitely go for it! But from reading your blog I feel like you’ve found a happy medium already. Who wouldn’t want to travel to the US and enjoy a 50% savings rate?

      Thank you for the kind words and for visiting,

  2. Even though our savings is all going to debt, we are saving in the low 60’s percentage right now. Oh how I wish we had learned earlier!! You and all the young FI bloggers are doing great! Big congrats! You guys make me proud!!! 😀

    1. You’re never too old to learn! You show that every day through your blog. Your lifelong insights prove way more valuable to the community than the ramblings of fresh-out-of-school me, at least in my opinion.

      Thanks for the continued support, it really helps!

  3. I’m probably a bad PF blogger in the sense that I rarely/never think about when I’ll be “free” — I just keep throwing money into my retirement accounts and hoping for the best =p

    At age 28, I’ve socked away a few tens of thousands of dollars for retirement… which is kind of amazing when I have friends that STILL haven’t even started yet, but at the same time I look at the balance and think, “oh shit, that’s not enough”.

    My old age years are too far away for me to accurately assess how much I’ll need, but I know how much I want: I won’t feel comfortable until there’s a $2 million in those accounts. Long way to go!

    1. I don’t qualify that as bad, but rather as reluctant! 🙂

      That doesn’t mean I don’t understand where you’re coming from. I’m kind of in the same boat. I truly believe in everything I write, mostly because of research and other bloggers leading by example, but until it happens for me there will always be a little voice in the back of my head telling me to doubt myself.

      We’re both still young, we’ll see where we end up! No reason to stress out about it. At least we’re doing better than 95% of people out there savings-wise.

      $2 million is a high amount though, I hope you get to reach your goal sooner rather than later! Good luck!

  4. At least we Canadians aren’t *the worst* haha!

    I think 50% is a good place to be. My wife and I value travelling, adventure, time and gifts with and for friends so while we could probably live like frugal beasts, we would have to forgo the things that we value in life. The trade off isn’t worth it for us, but it may for others.

    But 50% should be the benchmark everyone aims for. Great, simple post! Liked the 2 extreme examples, really drove home the message!

    1. Don’t worry! The Danish actually have a negative savings rate! 🙂

      I think 50% is a happy medium for a lot of people, depending on their income. Saving more is not worth it if you have to give up the things you love most.

      Currently I’m saving a bit harder than I’d like to in the long run though, just to get my portfolio going and enjoy a little bit more compounding at the start.

      Thanks for the compliment!

  5. Don’t mean to complicate this but what about how little his 40k euros will be worth in 20 years given the average inflation rate! Interesting note though, I wonder what drives the Swiss saving rates, all the banks there?


    1. Don’t worry about complicating things, Jay!

      The 4% rule basically states that you start off by withdrawing 4% from your portfolio in the first year of retirement. In the second year, you adjust that 4% amount to inflation.

      If you need €40k the first year and inflation was 2% that year, you’ll have to withdraw €40,800 the next. The Trinity study took this as a basic premise, otherwise you won’t be able to sustain your retirement lifestyle.

      Be sure to read my post on the 4% rule!

      Maybe the fact that the Swiss earn a lot more than most of the OECD countries, at least in my experience? I was a bit surprised by the numbers, actually. Last week I read an article that stated the average savings rate in Belgium was 14.3%. Maybe the OECD study literally counts everyone, even children and retired folks who naturally save less.

      Thanks for stopping by,

  6. This is something I’ve definitely been thinking about a lot. MMM really got to me about a year ago, and I’ve been contemplating it since then. When my debt is gone I’d have roughly 30% to add to my current 15% (mandatory savings from work) which would make for a great savings rate. Even if I eased up a bit I’d still hit FI long before the regular 65.

    1. I get what you mean, the same thing happened to me about six months ago!

      45% is a great savings rate. You’ll hit FI way before 65, don’t worry! And if your salary goes up in the future it’s likely that your savings rate will as well.

      Good luck on paying of your debt!

    1. Thanks! I’m trying to get the message out about saving to as much people as possible, but it has been an uphill battle in real life. I’m glad to see others saving a massive amount of their paychecks.

      You’re welcome for the mention!

    1. You’re right that it’s a mind set, Henry. Lots of people don’t want to save, they rather just buy a new set of shoes or a shiny new car.

      Once you get your head in the game though, it’s amazing what you can achieve!

    1. Haha, you should definitely try to get her on board!

      I’m running a one man show, so no worries about having an overspending wife! 🙂

      Thanks for visiting,

  7. NMW,

    I definitely aim for a 50% savings rate. I’ve been able to exceed that mark for the last four years now, but it’s going to be a challenge now without the full-time job income. But in the end it’s all about being happy, and I’m definitely a lot happier writing for a living. 🙂

    I think 50% is the benchmark for serious saving. Saving 20-30% of your net income is still impressive, but 50% gets you into that rare territory where you can start talking about retiring extremely early and doing whatever you want with your life.

    Thanks for the mention!

    Best regards.

    1. Hey DM,

      In your case dropping below 50% isn’t too much of a problem since you’re actually already semi-financially independent from your writing! And you’re in a much happier place now than when you were working full-time.

      A lot of people above mentioned 50% as a sweet spot too. If you want to retire really early that’s the minimum amount you should save each month in my opinion. It’s also the easiest rate to keep track of mentally.

      You’re welcome!


  8. NMW,

    SInce a lot of belgians take in acount the mortgage payments I will do the same, which places my saving ratio around 70 – 75%. Because the woonbonus it is actually saving. The belgian state is paying my interest:D.



    1. Geblin,

      75% is incredible! Especially in Belgium!

      Ha, the fiscal benefits from buying your first property make a big difference in the long run, although I am 100% convinced that housing prices would be much lower without that policy. Just wait until the interest rates on mortgages start to go up again now that some changes have been announced to the system.

      I still rent because it makes more sense to quickly build some capital and the area I live in is very expensive to acquire an apartment.

      Keep on saving!

    2. Thx 4 the woonbonus tip Geblin,

      64% sounds better than 58%

      Can’t wait to set my work phone voicemail to the rage against the machine classic:
      Fuck you, I won’t do what you tell me…

  9. Great post NMW! Defintely something our parents never taught us, but like we were mentioning before, they are relying on decent state pensions as well as my dad’s health service pension, so they never saved separately for retirement.

    They did however, teach me about about saving by way of paying off the mortgage early. They managed to do that in the 80s when interest rates went through the roof! I have decided to do it slightly differently to them, by re-mortgaging to a lower rate as and when I can. I did it last year and it wiped £22,000 off my balance, without em even having to pay a penny. Of course, that means my monthly payments are less, so I am trying to add the saved money to our investing monies.

    Best Regards,


    1. Thanks, M!

      Most people over 50 count on pensions in Belgium, I think. My parents, however, really fear there’ll be nothing left by the time they retire, so they’ve been saving a good deal throughout their life, but more on an ad hoc basis (how much is left over at the end of the month), whereas I try to save a certain percentage no matter what.

      Good deal on the mortgage! £22,000 is a lot of money for no work at all! 🙂
      Paying off a mortgage early could save you money, but also take inflation and opportunity costs of investing less into consideration when deciding to pay off early. I think your current strategy is just fine.


  10. This is a great post that lays it all out NMW!

    The path you write about is one I know well. I started really paying attention to my household’s savings in 1997 and retired completely from the work force in 2008 at age 48. This involved no major sacrifice. The highest our household savings rate ever reached was 55%. The lowest it ever sank to was about 20%.

    I’ve been retired for six years now and don’t miss going into the office at all. Nor do I miss the income. The freedom my wife and now enjoy is worth much more than any money we left on the table by quitting while we were both still in our 40s.

    The path of early retirement makes so much more sense than the mainstream path of working until age 65+. I hope that your blog keeps inspiring readers to value their future freedom more than they value their current consumption.

    1. Thank you, Noonan! Means a lot to me coming from you!

      I’m glad to hear that a 50% savings rate didn’t involve any sacrifice on your part. It seems like 50% is the golden standard for balancing saving and living life to the fullest for most people.

      So glad you’re living the dream! Testimonies like yours truly make me believe in financial independence and early retirement. They keep me motivated to stay on track.

      Have a great weekend,

    1. Marie,

      I’m glad you find the retirement calculator useful!

      Saving 50% really kickstarts financial independence. You should definitely try to convince your husband.

      Good luck!

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