Extreme Savings

How will I retire, and how much will it cost me to retire? In today's post, I'll go through some simple math to help explain why the conventional wisdom on retirement--to save 10% of your income--is not only laughably insufficient, it condemns people to a lifetime of wage slavery. At the end of this post, as a bonus, I'll show you how you can apply an extremely aggressive savings strategy to retire, comfortably, in about eight or nine years. Yep, you read that right: eight or nine years.

[A quick warning: readers who are unwilling to save money, or those readers who carry around a prepared list of ego-defending excuses why they CAN'T save money, please don't read any further. This post will be useless to you.]

Those of you still here, consider the following five savings options:

Option 1: Save 10% of your income:

Let's say you obey the conventional wisdom and save just 10% of your take home pay. That means, by definition, you will live off of the remaining income you take home, or the 90% that's left. To illustrate it in dollars, let's say your household takes home $75,000* in income. If you set your savings at 10% of your take-home pay, you would save $7,500, and your spending (or better said, your annual expenses) would therefore be $67,500.

Thus at a 10% savings rate, it will take exactly nine years to pile up the $67,500 needed to have a one year war chest of savings ($7,500 x 9 years = $67,500).

10% savings per year = 9 years to accumulate one year's worth of expenses.

Ugh. Nine years to save up one lousy year of expenses? Nine? If it takes that long, why bother? Sadly, that's most people's default response when they start thinking about their financial future--and it explains why few people bother to save at all. It just takes too long to see results. Clearly, we need a better, faster and more aggressive option.

Option 2: Save 20% of your income:

Once again, by definition: if you save 20% of your income, you'll live off the 80% left over. So, using the numbers from above: on a $75,000 income, your savings will be $15,000 (that's 20% of $75,000) and your expenses will be $60,000 (80% of $75,000).

Therefore, using a 20% savings rate, it only takes four years to pile up a one year war chest of savings. ($15,000 x 4 years = $60,000).

20% savings per year = 4 years to accumulate one year's worth of expenses.

That's a lot less painstaking, isn't it? Less than half the time! But we're not finished yet. Let's look at another example:

Option 3: Save 33% of your income:

Let's be still more aggressive. Save 33% of your income, or one third. Again, using the numbers from above: if you save 1/3 of a hypothetical $75,000 take-home pay, your savings will be $25,000 and your spending--once again, by definition--will be the remaining $50,000 left over.

Therefore, using a 33% savings rate it takes just two years to pile up a one year war chest of savings. ($25,000 x 2 years = $50,000).

33% savings per year = 2 years to accumulate one year's worth of expenses.

Wait, you think two years is still too long to build up a huge, one-year financial buffer? Keep reading.

Option 4: Save 50% of your income:

What would happen if, in total contravention of the American way, you were to save 50% of your income? That's right, half. In this example, your savings would be $37,500, and you'd live off of the other $37,500.

Presto: you've saved a full year's war chest in just one year.

50% savings per year = 1 year to accumulate one year's worth of expenses.

By now, I'm sure you can see exactly where this is going. This percentage-based savings formula gets incredibly powerful the lower you manage your expenses relative to your income. But keep reading... it gets even juicier.

[A brief, final warning for any close-minded or consumerist readers who have--against all odds--made it this far into this post: stop reading now. What you're about to read will be even more incomprehensible than what you've read so far.]

Option 5: Save 75% of your income:

What happens if you save 75% of your income? Let's go through an example:

If you had a hypothetical income of $75,000 and you chose to save 75% of it, or $56,250, you'd have a gloriously low expense line of $18,750 per year. But wait: if you can maintain a savings rate and expense line like this, it will take you a mere four months to save one year's worth of expenses.

75% savings per year = four months to accumulate one year of expenses.

The Secret To Retiring Early
Okay. Now, let's look at the 75% example in a slightly different way. Forget four months: if you can manage to maintain this kind of a savings rate for a full year, by the end of the year, you will have saved three full years' worth of expenses.

Now, imagine sustaining this savings rate for a series of years. This is more or less what Laura and I did during an eight or nine year period beginning in the year 2000. We chose to make a temporary (readers: notice the emphasis on temporary) choice to be crazily aggressive in maximizing our savings and minimizing our spending.

Think about it: if you spend eight or nine years saving and spending at the rate discussed in Option 5, you'll have put away at a minimum about 24 years' worth of expenses. And this ignores any compounding of additional income you could earn by cautiously investing your swiftly-growing pile of capital into income-generating investments like dividend-paying stocks, preferred stocks, bonds or tax-free municipal bonds.

In other words, at a 75% savings rate, it takes about eight or nine years to get to a state of financial independence. Read that sentence one more time.

Finally, note that you can apply this same math to the other, less-aggressive savings options. For example: at a 50% savings rate option, it takes about 20 years to save up 20 years' worth of expenses (it could take far fewer years if you can earn solid investment returns over those 20 years). Oh, and don't bother to calculate the time to 20 years' worth of expenses using the 10% savings option. Just trust me: it takes a really long time.

What's the central lesson here? Well, one sad lesson I've learned is to expect a lot of blank, uncomprehending stares when explaining these ideas. :)

Beyond that, however, the central lesson is this: we love to pretend our expenses are largely out of our control. But in reality most of us passively permit our expenses to be set for us by outside factors like social conditioning, our need to fit in with an imagined peer group, or by ego-protecting justifications that we "deserve" a certain standard of living.

And yes, it's easier to hold the limiting belief that it's all out of your hands than it is to put the creative work into actively and aggressively managing your savings and expense levels. I get that. Even worse, in order to take back your power over money, you'll have to directly contravene our consumption-based and status-based culture. You'll undoubtedly face difficult social pressure from friends, family, co-workers, or anyone else who may want to validate their own egos and consumption-based financial decisions--at the expense of your personal financial health.

But in eight or nine years, which path would you rather be on?

Readers: which of these five savings options will you choose... and why?

For Further Reading:
Early Retirement Extreme: A philosophical and practical guide to financial independence by Jacob Lund Fisker
See also
Jacob's excellent blog, where he shares in great detail how he essentially applied "Savings Option 5" and did it on a surprisingly low income. I discovered Early Retirement Extreme some years after Laura and I had already shaped our ideas about consumption, saving and spending, but Jacob's blog echoes our views closely. It's a mind-opening read and well worth digging through his archives.

Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin and Joe Dominguez
As readers know, this is the book that
changed everything for us. It helped us shift our minds so that the ideas I've shared above shifted from laughable to plausible.

Update! I've since written an in-depth, chapter-by-chapter handbook for Your Money Or Your Life that readers can use to help them along with Joe and Vicki's book. 

3) Recent articles in the New York Times (on living in a low-return world) and Yahoo Finance (on early retirement). PS: note who's the final example in the Yahoo article.

* Last of all, a few important footnotes:
1) Don't let the specific $75,000 income number sidetrack you from this post's central idea. Rather than fixate on the dollar amount, focus on the percentages and apply them to your own income situation, whatever it may be. Depending on your level of creativity--and your lack of a need to impress people with your possessions--you can apply the ideas of this post to an extremely wide range of income levels.

2) All dollars are in "take-home" (read: after-tax) dollars, not gross salary. By all means feel free to use your gross salary to try and impress the ladies, but if you base your spending and budgeting decisions off your gross pay, you will live a miserable, debt-mired life.

3) I'm grateful that CK's regular readers never slip into excuse mode after reading posts like this. However, if you do find yourself tempted to leave an excuse-based comment (such as: "it's ridiculous that people take home $75,000 a year," "these ideas are easy for you but they're impossible for normal people," "there's no WAY I can save that much money, here's why" or my personal favorite: "you're just an elitist who has no sympathy for those less fortunate who can't save like you do"), do yourself a favor and read my post on excuse-making, and then read my series on the Yes-But Vortex. Then you may comment. After that, though, please take action.

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Anonymous said...

All I got is that I feel like sh!t fo barely saving 10%, but...

Oh hell, I'll list my personal excuses even though I read the caveat.

1. Purchased at the top of the market = just under too much mortgage (& now underwater - so stuck)
2. high local taxes on top of federal taxes/ lots of lovely pay check deductions for health care & charity
3. Student loans
4. day care, then private school tuition - my taxes are high, but the schools still suck
5. have you seen the price for a gallon of gas? (new car note after "charging" too much on car repairs on the old clunker - yay I have a credit card bill again.)
6. My only saving grace is that we eat relatively cheaply (though admittedly we could do better).

Anonymous said...

It may be temporary at live at 25% of your take-home while saving 24 years of expenses, but then it's a permanent reduction in lifestyle for those 24 years, too.

Jacob unretired, didn't he?

Answering your question, we put away 12% and 16% for retirement with our employers.

Of the remaining ("real") take-home pay, we saved more than 55% in the last three months. (I'm going with a three month average because one of our incomes isn't consistent.)

We're not doing it for early retirement, though. We want to buy a house.

Bing Wu said...

I think the central idea here is that the more you can save the lower your expenses will be, so really every dollar you save is really like saving $2 - it adds to your savings *and* reduces your expenses, provided you're willing to sustain that level of expenses.

Maybe we can't all save 75% (that is probably not happening for me anytime soon), but maybe we can do 33%, if everyone in America did that, very few people would have to worry about retirement.

Stuart Carter said...

I once posted a link to one of your real food posts on my livejournal. I got into a snitty exchange with someone who came out with all the usual "but what about people who can't (whatever)!!!oneone!!".

This person just didn't get that "this is not about someone else. This is about *you* and what *you* can do to make *your* life better". Sadly, there are a lot of people out there like that - and they are the kind of people who will snipe this post for the same reason.

Not a moron said...

This is pretty stupid advice. Sure, reducing your expenses means you can save more, and when you're saving so much that your expenses are down it looks like you're saving a greater multiple of your expenses, but it's an absurd argument. I mean, hell, if you can get your expenses down to $1, you can save several hundred years of living expenses in just a day!

Or, you know, you can save what you can comfortably and not live like you're in communist Yugoslavia. What's the point of saving for retirement if you're going to be utterly miserable for all your working years trying to live on some artificially austere budget? And if you can live on such an austere budget, why not save 10-15% now and plan on living lean in your retirement years? You'll need way less money!

Say you make $80k. Under the plan proposed here, you save $60k and put away three years of living expenses every year ($20k.) Of course, living on $20k a year means you're well below the poverty line, but so what? You're saving money!


Martha said...

We did something similar, out of fear after the recession (or whatever it was) in the late 80's. We lost a house, and sold everything extra.
Then, with a new job, rather than jump back on the "merry-go-round", we saved everything we could (%?) and we bought a shack on a good lot. We remodeled it over the next 20 years using cash and made a nice home for our growing brood. Then when the house was finished( modestly),we kept our lifestyle and we put the extra into savings for retirement. We have had no mortgage, no credit card debt,and own a great house in an expensive town. All on one salary under $50,000. We have adopted and raised 6 kids and fostered many more.
Our family philosophy is this: “The secret of happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.” - Socrates

Anonymous said...

It would be more helpful if the article included some tips on HOW to save such a large portion of one's income...that being said, I think I'll take my chances with saving about 10% of what I make and live a happier life now. We could all die at any time.

Daniel said...

Already we have a few commenters who clearly failed to read the warnings and footnotes. :)

A few quick thoughts:

For Anonymous (3:41am): Why have you given your power away to your excuses?

Bing: Exactly. That's exactly it. The point is choose your level and don't claim it's out of your hands.

Stuart: Thanks for trying to take a stand against the "yes-but by proxy" excuse. The problem is, in that person's mind, there's no defense. They've already imagined someone with insurmountable disadvantages, thereby invalidating all advice and solutions.


chacha1 said...

Thank you Bing Wu for actually understanding this post! :-)

Personally: for the past three years, DH and I have been effectively "saving" 50% of our take-home pay ... using it to pay off debt. As of the end of this year we will be debt-free and able to save in excess of $2000/mo as well as boost contributions to my 401(k).

If we can get off my company's group health plan and into a private high-deductible plan, we'll save even more because our premiums will be cut by 50%.

In 4-5 years we will have enough in savings to pay cash for a retirement residence, which we won't need for 16 or more years, in our location of choice.

We have kept our expenses at a level where we can cover them with either of our incomes.

With gross household income of around $150K, we're aware we are lucky; but we also know people who make even more and don't save anything because their expenses consume their entire household income.

Mostly these are people who bought houses here in L.A. We rent.

Daniel said...

A quick word to Not a moron: Your comment is an exceptional example of excuse-making. One of the best I've ever seen.


Marcia @Frugal Healthy Simple said...

For a FABULOUS blog full of LOTS of "how to" tips (many of which boil down to "get off the consumerism train"), see

I mean really, this guy is awesome. No excuse making allowed. He also has forums on his site.

Also the simple living forums have a lot of good conversation going on.


Joanne said...

Well I certainly don't save anywhere NEAR 10% of my income a year...but I make so absurdly little that I don't think it would be possible once you figure in NYC rent. Albeit...my food expenses are abnormally high due to this whole blog thing. But I don't drink! Hmmm. Enough excuses. I think it's time for a budget.

Anonymous said...

How does saving work? A few years ago, I saved $9,000 in my 401K through payroll deductions & employer matching. I know I am lucky. I am so lucky that when the stickmarket turned, I lost $10,000.

I would have been farther ahead if I lived in communist Yugoslavia & stuffed it into my mattress.

Lauren said...

We're between 10 and 20%, and we struggle. We'd be quite content as things are except that we have a budget and every month the food column eats up the discretionary plus a little more. We rent, don't use credit, the car is parked except for out of town trips, and we don't party or shop for sport. One income and two kids after multiple relocations is a hell of a hole to dig out of. I guess I'm asking if you're calling this is an excuse, or are there legitimately "seasons" where less is the best we can do?

Ronda said...

This is interesting to me, since I'm obviously in a different world than most of your readers. :) We've just always saved as much as we possibly could, without a real plan. Of course, when a family of five lives on less than $30,000, the percentage isn't particularly high, but we always manage to save some. It makes me wonder what percentage we actually do save. Interesting post, and the comments even moreso!

oilandgarlic said...

What about home purchase? If you use your money to buy a house, does that "count"? I live in a high cost of living area and while we can save a big chunk of our income, if we use that to buy a house, we would not be able to. I know a house has value but we pay very low rent and I also worry about being upside down on a mortgage, which is a common situation in our area.

Alyssa said...

I have to say, as a student who visits your site for advice on living cheaply because I already live on $12,000 a year I find the insistence that people who don't save are "making excuses" rudely presented. I already don't go out to eat with my friends because I can't afford it, and I haven't bought new clothes in years despite most of them being from early high school and starting to fall apart. Remember that your readers are a diverse group.

Daniel said...

Many more excellent comments. Thank you. A few more thoughts:

Lauren, you tell me: thinking about it honestly, is it an excuse or not? I'd agree that there are times in a person's life where you can best take advantage of this system and times where it will be more difficult. Joanne (two comments above you) is a good example of the latter: she's working on an MD/PhD, but her economic situation will change when she finishes her schooling.

oilandgarlic: I think you may have answered your own question. :)

Ronda, great point, and thank you for showing other readers how it's done. PS: I have readers from all income levels, and you are definitely in the same world.


Daniel said...

Alyssa, agreed, I do have a wide range of readers here, and it's possible that this post may not be geared for you at your particular stage in life. Just remember, though, that this post may very well be extremely useful to you at some point in the future.

The question is: in the future when your income situation changes and you can choose among these savings options, will your response then be to actively decide how much of your income you will save? Or will it be closer to Not a moron's response, which likens saving money to suffering, living in communist Yugoslavia, and so on?

If you choose the former and not the latter, then the references to excuse-making clearly don't apply to you.

One final thought: I've been writing here at CK for a long time, and I knew that if I hadn't included those warnings and footnotes, this post would most likely have been overrun with negative comments, and it would have crowded out the more solution-based discussion that we're currently having here.


Anonymous said...

agree with the sentiment. though it's important to realize taxes amount to another 10-25% of income as well depending on how aggressively you write-off things. So a 75% savings rate + taxes basically is a null answer; the actual savings rate would have to stand lower.

Daniel said...

Anon, no, all of the numbers I'm using here are in after-tax, take-home pay terms. It still doesn't make the 75% savings rate option easy, but it does make it possible.


Diane said...

Well, it just seems like a math exercise to me. It's a continuum from X% to Y% savings and just a straight line function with no mystery. But there's not much advice on "how," just the math. I saved well over 50% of my income for a long time. It did allow me to live for 1.5 years with no work. Now I am saving about 20%.

I think it really doesn't matter how much you save as long as you do it. I think that saying "save 75%" is counterproductive as it just gets people think if they cannot do that then why bother. It's always wise to save. Always wise to put some away. 75% is well beyond what most people can do, and approaches the vanishing horizon, but some is good in any case.

Daniel said...

Diane, well-put, although I think if a reader interprets "save 75%" to mean "why bother" then that reader has veered into dangerous excuse-making territory. It is just one of a broad range of options, as you so thoughtfully wrote.

A quick word now that two readers have asked for advice on how to save. Let me recommend two steps:

1) Go get a copy of Your Money Or Your Life.
2) Read it carefully and with an open mind.


Amy said...

I enjoyed the post and the math looking into savings. I think the commenter who made the post about "seasons of life" with regards to how much to save is on target. As a family, we had built up 2-3 years of savings, but decided to payoff our mortgage and then maximize savings from that reduced expense. Unfortunately after that we were hit with some very high and unexpected medical costs, necessary childcare costs (that weren't anticipated), etc. So while I definitely agree that this sort of savings can be done and can be extremely beneficial; I think having the flexibility and recognizing that there may be different target goals for different times of life is important, especially if priorities change.

Kate said...

There's some amount of money that it's possible to live on. For the sake of argument, let's say it's $16,000/year after taxes (it's probably a little more than that, honestly). At that level, you're making ends meet and probably making sacrifices to things like medical care in order to do so.

If you cut the remainder of your expenses and live on that amount of money, you will be saving as aggressively as possible. For the median household, that's saving about 60% of post-tax income. Any more than that is impossible.

In fact, the minimum amount of pre-tax income you need to pull off 75% is around $75,000.

I think the main issue I have with this article is that it tries to present 75% as a plausible number. In reality, you'd need to be in the top 30% or so of households to even consider that. But the example value of $75,000 post-tax is even more restrictive than that.

You'd need around $40,000 pre-tax to even consider 50%. There are plenty of people who don't make that much. And 20% would require an income of around $25,000. Plenty of people don't even make that much.

While the general idea of "you can probably cut some expenses that you think are necessary but aren't, and if you do you'll save a lot more money" is a good sentiment, I think it would be better presented with numbers that are actually meaningful to the general population. The rich get to play with numbers like this. Most people don't.

You focus on consumerism as the reason why people aren't saving. And while that is certainly part of it for many, I think the greater reason people aren't saving is because they don't have the income for it (which is then compounded by consumerism and the idea of "well I don't have much to save, so why bother at all").

To me, this article comes off as saying something like "seriously, free your mind and consider saving 75%. You can do it if you try really hard. I mean, your annual household income is like $90,000 or more, right?" And, well, that isn't very helpful. If you want to convince people to save aggressively, you can't start by assuming an income significantly above the norm.

Daniel said...

Kate, I recommend you take a close look both at Jacob Lund Fisker's book Early Retirement Extreme and also the Mr. Money Mustache blog. You'll see, clearly, that this can be done at a far wider range of incomes than you realize. Again, as per the footnotes above: don't fixate on the numbers, figure out what level of aggressive savings you will actively choose for your personal situation.

And then a general point to readers of this post. Yes, there are "plenty of people" who don't have enough income to save aggressively. But this post is not about other people--this post is about you. What are YOU going to do?

Are you going to rethink how YOU save and spend, or are you going to think up a hypothetical person for whom this won't work and then use that as a justification to reject the ideas here?

Is the fact that there exist people who can't do something a real reason for YOU not to do something?


Kate said...

The article focuses on the numbers, though, even while telling you not to, and the numbers are entirely unrealistic for most situations. Keep in mind that I don't at all reject the idea of aggressive savings based on your means, I just think the way it's presented here is a bit misguided.

Personally, I already have moderately aggressive long-term financial plan that seems to be working for me, and I don't spend a whole lot to start with. While it's true that I'm not saving the maximum amount possible, I'm not your target audience by any means. But from my angle it reads as though it's saying "you can do so much better, look at how realistic these really high numbers can be!"

And then I'm trying to work out how to get numbers like that, and asking questions like how I'm going to manage without a car, what medical care is the least important, if we can go without heat in the winter, and etc.

Regardless of the article's message, that's what it communicated to me, and my income is a lot higher than most people's. Then I got to thinking about my best friend who has to live on about $15,000 a year post-tax and post-not-dying-from-diabetes, and isn't really making ends meet as it is. For her, even 1% is significantly more aggressive than the hypothetical $75,000 person's 75%.

I'm sorry if I misinterpreted your article's message, but I hope you can understand where I'm coming from in terms of its presentation.

Daniel said...

No worries at all. Your comments are always very helpful Kate.

It's just that I want to help you consciously choose the level of savings that's right for YOU, not on what's theoretically possible for some other person who has different means than you.

I also see no problem at all telling readers, in effect, "you can do so much better!" What would you have me do, tell them the opposite?

Again, you must choose the level that's right for you.


Kate said...

Of the given percentages, you provide the most detailed rundown for the 75% level, talking about the virtues of being able to save a year's money in just four months, which inspires thoughts "Wow, wouldn't that be great? I could retire decades sooner!"

But then people go to figure out if they can get there and they find out that they literally just can't. I'm assuming you're writing for the general public, and since your blog frequently shows how to save money on food expenses, I'd presume you're even targeting people who could benefit significantly from doing so.

So really I'd just suggest using an example that targets the average reader. A quick calculation of taxes on median household income shows that the 50% level is as aggressive as they can realistically be - assuming they don't have outstanding debt already, like the crippling student loans that my generation is frequently saddled with, and assuming they don't have children. Given that most people have debt and most people have kids, even that is unrealistic.

In reality, saving 40% of your income, provided you invest it wisely, is an outstanding and very aggressive rate for the average person. And invested wisely, it will be more than enough to retire comfortably in good time.

So use that as an example. If you really want to show off an unrealistically high number for the sake of argument, that's 50%, not 75%.

As it is, this seems written for high-income people who don't save any money because of inane status competition, but given that they're to blame for their own problems, I don't think they deserve a lot of attention. And even if you disagree, they'd be plenty good to go if they saved 40% anyway, so there's no real reason to try and convince them to go higher than that.

On top of that, rather than focusing on consumerism and people who don't like to save, maybe call out that the numbers here are going to vary based on income level, and that they may be unrealistic for those who make less than the national average. You know, the people who are most in need of having a sound, long-term financial plan. And stress the benefits of saving whatever they can manage, even if that's only 10%. And I'm guessing we can exclude anyone who can't even manage that, because this is America, right? We obviously don't care about them.

If you want to empower people to take financial control of their own lives, you need to show them what's possible. If you focus on things that are impossible for them, you're going to have the opposite effect entirely. Choose examples based on your target reader, and make sure you're not making unrealistic assumptions about them. And if your target audience really is "irresponsible high-income people" then call that out explicitly.

And make sure you know that people really are making excuses before you call them out on it. Survival isn't an excuse, it's survival.

Daniel said...

Kate, thanks again for another good comment.

I think there are many ways to interpret this post. One way is to assume it's for high-income people who don't save any money because of inane status competition. I'm not sure, though, that explicitly saying "hey you irresponsible high-income people! This post is for you!" would convey the message. But hey, I might be wrong about that. Maybe I'll use that as a title for a future post. ;)

Another way to interpret this post is to assume that any savings rate above a level that you consider possible, is therefore impossible for you... as well as for anyone else who's not wealthy or high income. If this is what you believe I simply would direct you over to Mr. Money Mustache's site as well as Early Retirement Extreme. You'll find plenty of contra-examples to this belief there.

Note also that this belief is one of those self-fulfilling beliefs. If you believe it's true, it will be.

I'll go back to what I said before: you must choose the level of savings that's right for you.

One final thought: I did write a follow up post on this one covering the perceived insensitivity that some readers saw in this post. Have a look and see what you think. It directly addresses many of your thoughts and concerns.

If the link doesn't work, just paste this into your browser: