Savings Rate and Time to Financial Independence
The average savings rate in the United States is about 4%. I read financial articles recommending a 15% savings rate. Some recommend a 15-20% savings rate. For high opportunity cost professions such as CRNAs, a 15-20% savings rate is your ticket to employment into your 70s.
Let’s make assumptions about the CRNA:
The average new grad CRNA is likely in their early to mid-30s. I’ll use age 34.
Based on my financial coaching clients in their 30s, the average net worth is $150,000 South of $0.
I’m a believer of the Trinity study and the 4% rule. This rule allows a 4% annual portfolio withdrawal during retirement to sustain a retirement without earned income for 30 years. To find your FI number, multiply your cost-of-living * 25.
$100,000 COL * 25 = $2.5M
$250,000 COL * 25 = $6.25M
That $2.5M should be investable assets, not net worth. Investable assets such as retirement accounts, brokerage accounts, and cash flowing investments. A personal residence does not count towards your FI number.
I spend probably 45 minutes on the Trinity study and the 4% rule in the TFC online course, so I’ll leave it there.
Let’s make investment assumptions:
8% annual portfolio return
3% annual inflation
4% fixed withdrawal rate
Great, a reasonable low-cost, passively managed index fund plus bond portfolio could reasonably average 8%. This leaves a 5% return after inflation.
Keep in mind this table uses gross income to calculate savings rate. It’s a slight overestimate for those with a high tax burden, such as CRNAs, but you get the idea. Taxes are an expense and cost of working, not necessarily a COL.
Here is that table:
And the table in chart form:
Case Study:
34-year-old CRNA
Net Worth: -150,000
Income: $250,000
Net Income: $15,000 per Month
Let’s apply a 15% gross savings rate of $37,500 annually. Debts are paid in 4-5 years. Now age 39 with a net worth of $0. Assuming 43 years to reach FI, this CRNA is now 82-years-young!
Even with a 401(k) match and tax-advantaged accounts, FI doesn’t show up until age 75. Not great.
The Financial Cocktail recommends saving 25-50% of net income beyond debt payments. That means at a minimum, pay $2,000 towards student loans and another $600 towards the vehicle, but save an additional $45,000 and $90,000 annually.
I already know that someone will say I pooh-poohed a 15% gross savings rate because it takes too long to retire. AND $45,000 is 18% of $250,000. Remember that $45,000 is on top of all debt payments, so there is a minimum of $69,000 going to work. That’s 28% of gross income doing work until the debt is paid.
Here is what that breakdown looks like:
The chart counts taxation towards expenses. Well, that portion won’t be an expense upon retiring because there won’t be any taxable income (except for taxable withdrawals of course).
The table says this setup would be 29 and 39 years to retirement (age 65 and 75). Accounting for increased taxation, here is what I calculate.
$111,000 * 25 = FI number of $2.78M
If this CRNA chose to invest the previous student loan payments, FI would be reached in 22.8 years or age 59. Not bad. Leaves some wiggle room.
$135,000 * 25 = $3.38M
If this CRNA chose to add the previous student loan payments to COL, FI would be reached in 31.3 years or age 67. Not great.
Taxation at work. According to the IRS, the bottom 50% of those with income in the United States have an average effective tax rate of 3%. Even the 75th percentile only has an effective rate of 10%. Employed CRNAs probably have an effective tax rate between 20 and 28%.
Because this table uses gross income, it’s not identical for everyone at every income level.
It’s unlikely this COL would be maintained, but here it is.
$66,000 * 25 = $1.65M
FI would be reached in 11 years or approximately age 47.
And if adding the student loan payments to COL while maintaining a net 50% savings rate:
$90,000 * 25 = $2.25M
FI would be reached in 16.3 years or approximately age 52. This is a great scenario to shoot for. Solid COL in most places for a single individual. Savings rate is strong. Freedom to retire with plenty of active years remaining.
Disclaimer:
This is an oversimplified example to show the non-linear correlation of savings rate and time to FI. There are also major differences when accounting for taxation, retirement accounts, and a whole host of other variables not accounted for in this post.
The Take Home Message:
High opportunity cost professions are often accompanied by large incomes. This is great, but the debt burden really sets us back in three ways.
Investments don’t start at age 18. They start at age 30 or 40 which inhibits compounding growth.
The first few years of income are spent cleaning up debt instead of investing.
It’s tough to be a middle-aged high-income earner and live cheaply. Whether it’s the sense of professional entitlement or a family with three kids, costs increase during midlife.
Altering the “expenses side” of the equation leads to FI far quicker than altering the “income side.” This being said, a 15% savings rate is unacceptable when starting out. Achieve that 25-50% above and beyond debt payments. This ensures you won’t need earned income in your 60s.
After you bank a couple $M and reach coast fire status, SURE, cut back the savings and start spending. You no longer need to save because you saved and invested like a mad man for long enough. If you aren’t sure how to do this, check out my course. It’s far cheaper than making financial mistakes for a career.
Good luck and thanks for reading!
