# Is Your Personal Account Growing for Retirement?

*This is a guest blog post from Howard Polansky of Cash Flow Coach.*

I love to analyze numbers. Making projections about how much money this will grow at X% over Z years is just easy for me. But I have to be honest and know I am driving myself crazy over that stuff. If someone asked me what numbers they should track if they could only follow one statistic in their own personal financial life, I would tell them to track their savings rate.

So what is the savings rate? It is the amount one puts in savings, on an annual basis, plus investments, divided by the gross income of the household. The higher this percentage, the more confident you’ll be that you can retire when you want…on your own terms.

### Putting it to Practice

Let’s use our household example of $100,000. If someone can put $10,000 away for the future, you might think they have a 10% savings rate. However, that is incorrect. Yes, they did bring home $100,000. They were able to save $10,000. But the $10,000 should be divided by the $90,000 in expenses (taxes, food, utilities, life, etc). The true savings rate is 11.1%. But I want to take this one step further.

I am NOT considering the growth of the $10,000. I am keeping this simple. If my lifestyle costs me $90,000 per year:

**If you save $10,000 per year, you need to work 9 years to afford 1 year of retirement at $100,000 income.** If you are 25 years old when you read this, and want to retire at 65, you’ve only “bought yourself” about 4 years of retirement.

### Consider This

- What if we got a raise to $120,000, but lived the same as before? I can now save $30,000.

**If you save $30,000 per year, you need to work 3 years to afford 1 year of retirement at $120,000 income.** If you are 25 years old when you read this, and want to retire at 65, you’ve “bought yourself” about 13 years of retirement.

- What if you switched companies and got an increase to $180,000, but lived the same as before? You can now save $90,000.

**If you save $90,000 per year, you need to work 1 year to afford 1 year of retirement at $180,000 income.** If you are 25 years old when you read this, and want to retire at 65, you’ve bought yourself about 40 years of retirement.

- What if you started a business and crushed it, making $990,000, but lived the same as before (I know, I know – your lifestyle will have gone up, but follow along)? You can now save $900,000.

**If you save $900,000 per year, you need to work 1 year to afford 10 years of retirement at $990,000 income.** If you are 25 years old when you read this, and want to retire at 35, you’ve bought yourself 100 years of retirement.

This is the reason it is important to raise your prices, as mentioned in the last article. The faster and larger we can create the spread between our expenses and our income, the sooner work becomes an option. How much time do you want to buy back and how fast do you want to do it?

So let’s figure out your savings rate together.

- How much money does the household make? What is the gross pay?
- How much money is saved per month AND put into investments for your future self?
- What is the difference between the first two questions?
- Take the answer to #3 and divide into #2.

Let’s say a household grosses $150,000. Between savings and putting into retirement accounts, they put away $20,000. That means their lifestyle costs $150,000-$20,000 = $130,000 per year.

Then we take $130,000 and divide by $20,000 to get the answer 6.5.

**If you save $20,000 per year, you need to work 6.5 years to afford 1 year of retirement at $150,000 income.**

Many people are not going to be in a scenario where they can save 90% of their income. It is possible. Start an internet business. Move to Thailand. Grind away for 5-10 years, and it can be done. But for the majority, what should be the savings rate we want to achieve? To have retirement be on your own terms as a possibility, the bare minimum to strive for is a 20% savings rate. To ensure that it becomes a reality, the top 1% of net worth individuals saves at least 33% of their income. That means $3 comes in, they save $1 and live on $2. My personal goals are:

- 33% savings rate
- 17% charitable contributions
- 50% all other expenses

Am I there yet? No, but I have the benchmarks in mind. And yes, I did not take into account the growth of whatever was saved over all those years. But this one statistic, and focusing on how to increase that savings rate, will make all the other mistakes you may have had with your finances disappear.