Whenever you talk with someone experiencing financial difficulties, it is almost universally expressed that the solution to their problems is earning more. That occurs at every income level, from folks scrapping for quarters to high earners, they all report they could achieve financial success and save a little more if they could just earn a few more dollars. Few people report a spending problem until a more thorough examination of their finances occurs. For good reason. We tend to let our incomes determine our spending habits with lifestyle creeping up with every pay increase or windfall and in many cases exceeding it. Your hear common phrases like “you’ll spend what you make” and “you only live once” uttered as justification. 

            While it is true that there are some individuals who truly underearn and won’t achieve their goals without an income increase, overspending on an otherwise sufficient salary is a much more common occurrence. It’s not what you earn, it’s what you keep that matters most at the end of the day. A person spending all of a $150,000 salary will be worse prepared to retire than a person making $75,000 per year and saving any of it. I’ve spoken to several well-disciplined individuals who managed to accumulate a sizable portfolio to fund retirement despite a moderate level of income. I’ve also known several high earners who manage to live check to check despite having plenty of resources to retire early in relative comfort. 

Of course, the result of that sort of prioritization of spending over saving results in the current U.S. average savings rate of 4%. It gets difficult to fund any sort of long-term retirement by saving only 4% and most experts are going to recommend 10%-15% as the bare minimum. 

For example, a 15% savings rate will fund a 30-year retirement in approximately 42 years if you follow existing rules of thumb for safe withdrawal rates, social security, and portfolio construction. Some people and some markets will beat that, but hedging that bet 20 or 30 years in the future becomes problematic. Following the same rules, a 30-year retirement would take an entire 70 years to save for at a 4% savings rate. 70 years is nearly double what a conventional career is and outside what’s possible with human lifespan.

            If you want to retire early, you’d better plan on saving even more. Following the same rules as above, a 2% increase in savings rate trims a year off of your full retirement age. Want to retire at 60? A 30% savings rate will get you there. If you want to retire really early, say 50, you’d better be saving 50% of your income to pull it off. That’s why when you look at the FIRE (Financially Independent, Retire Early) movement most of the practitioners have extremely high savings rates combined with some very frugal lifestyles. It’s also not unusual to see the term “retired” stretched pretty thin. Landlord, author, social media influencer, and freelancer are all “jobs” despite not looking like a regular old 9 to 5. An early retirement almost requires some alternate income sources, even with a high savings rate earlier in a career. 

            Despite all of the math, projections, advice and the entire balance of stock market and inflation data for well over a century saying otherwise…many savers are counting on double digit returns and single digit savings rates to carry them through retirement. It might work out for them, but probably not.

            It’s your savings rate, not your annual return that’s going to do the heavy lifting for you.