The Right Savings Rate Will Conquer Any Bear Market

Beginner, Goals, Tools

One of the things I like about the safe withdrawal rate is that it’s a rare financial metric that accounts for the worst case. While everyone else was comparing withdrawals to average returns, William Bengen had the foresight to study every investing period he could find and determine the maximum amount of money that a retiree could have safely withdrawn over 30 years even in the worst possible timeframe to retire. By flipping the problem from an exercise in chasing ever-shifting averages to studying worst-case scenarios, Bengen’s safe withdrawal rate really did make life after accumulation a lot safer for retirees.

Look at the title image of a pair of grain silos and imagine your comfort level with them filled with just enough grain to barely make it through an average year. Now picture them with enough grain to survive the worst famine on record. That’s a huge difference, and Bengen’s new perspective completely changed the way people think about retirement.

As helpful as that is, however, not everybody is in the phase of career and life where retirement is an impending concern. But I still find the approach enlightening, so let’s expand our thinking. Have you ever wondered what a similar metric might look like for accumulators seeking to guarantee long-term success in uncertain markets? Put another way, what percentage of your crop must you save in those silos every year in order to fill them by a certain date? And if the stored grain grows and shrinks on its own like money invested in stocks and bonds, how would that affect the results?

If that type of question feels as interesting to you as it does to me, this article is for you.

The closest research I’ve seen to address this issue is a paper by Wade Pfau discussing what he calls the “safe savings rate”, which he defines as “the maximum of all the minimum necessary savings rates from overlapping historical periods needed to build up enough wealth so that you can afford your desired retirement expenses.” Pfau’s approach is characteristically thorough with a special focus on retirement as an ultimate goal, and it includes a few unique assumptions like 50% income replacement, future social security income, and studying the full accumulation and retirement lifecycle as a whole. While I find it all quite fascinating and have even published my own similar Financial Independence lifecycle approach to funding a happy retirement, for these purposes I’m personally most interested in the underlying savings concept that is a bit more fundamental.

For a given portfolio, what is the “Safe Savings Rate” that successfully achieved a particular accumulation goal even in the worst historical investing timeframe?

It’s a simple question with important implications for many types of goals long before retirement enters the picture. But it’s also pretty tricky to answer, as there are a number of variables that all affect the results. Which means it’s just my type of challenge! So let’s dig in and work this out.

Visualizing growth uncertainty


If portfolio returns were consistent then the problem would be pretty simple. But the real world is a lot more messy than that, so we have to step back and think of the big picture.

Here on Portfolio Charts, one good tool for studying the inherent uncertainty in a particular savings plan is the Portfolio Growth chart. For a given starting portfolio value and annual contribution, it tracks more than 50 real-world growth paths since 1970 simultaneously and shows them all in a single image. For example, here’s the Portfolio Growth chart for the Classic 60-40 portfolio. This shows the full range of outcomes for different people over time who started with $10k and saved another $20k a year (all adjusted for inflation).

Let’s say that you have the same $10k invested and have a goal of reaching $1mm in 20 years. Let’s also assume you make $100k a year. What percentage of your income should you save every year? Follow the 20-year mark up to the horizontal $1mm line, and you can see that the point is right in the mass of lines which means sometimes saving $20k a year worked and sometimes it didn’t. To see how the contribution affects the results, here’s the same chart in increments of $10k.

Judging from the first image in the series, it’s painfully obvious that with no additional savings there’s no legitimate chance of meeting that goal. But the more you save the faster the growth, and there are two points of interest worth tracking — the best case and the worst case.

The best case scenario that succeeded in reaching the goal is when the orange square on the left aligns with the 20-year mark. That represents the luckiest investor in history who saved just enough to get over the finish line while being carried by a great sequence of market returns. Fine-tuning the numbers, that happened with about a $13.8k annual contribution.

The worst case scenario that still succeeded in reaching the goal is when the orange square on the right aligns with the 20-year mark. That represents the unluckiest investor in history who had to save a lot more over the years to make up for the particularly tough sequence of returns. Tinker with the chart long enough, and you’ll find that happened at about a $33.1k annual contribution.

Adjusting those contributions for a $100k initial income, then to reach the $1mm goal in 20 years investors had to save between 14% and 33% of their income every year. The low number is what I call the minimum savings rate, as no rate under that level has ever succeeded. And the high number is what I call the safe savings rate, as no number above that level has ever failed. While there are no guarantees in investing, the safe savings rate is an excellent target to aim for to put you on a very secure path to success.

A new tool for an important problem


While that system works pretty well, it admittedly takes quite a bit of manual iteration to seek out the necessary savings rates to meet a certain goal. And on top of that, the Portfolio Growth chart also introduces a little bit of error because of how it rounds the years in the calculations. So to automate the process to quickly identify the savings plan appropriate for any goal, I created a fancy new tool that I call the Savings Rates chart.

For reference, the image above shows the settings required to solve the same problem we studied with the Portfolio Growth chart. Enter the asset allocation, starting value, annual income, and final goal, and the tool will automatically find the minimum and safe savings rates over every investing period since 1970. And by adjusting the target timeframe, you can quickly sample both savings rate metrics from 1 to 40 years.

When interpreting the chart, it’s important to keep a few things in mind. First, the numbers are all adjusted for inflation to measure constant purchasing power. So a target of $1mm in 20 years represents a million dollars in today’s money, which means the nominal account value will be a lot higher than that when ignoring inflation. And second, the savings rate works a lot like the base assumption of safe withdrawal rates where it’s an initial value that is adjusted for inflation. So in practice, you’d multiply that rate by your income today to find your annual contribution, which you will then adjust up by the inflation rate every year independent of any changes in income. With a bit of luck and a lot of hard work, the hope is that your salary should outpace inflation over time so that natural contribution growth won’t be a problem.

Naturally the chart is highly personal and will look very different based on where you are in your savings journey. For example, here’s the exact same portfolio where the investor is already 25% of the way to their goal.

Notice that I toggled back and forth between two timeframe lengths to show a couple of different situations. At the 8-year mark, one lucky investor was able to get to their goal with a 25% minimum savings rate while other investors never got to the goal even if they somehow figured out how to save every dollar they earned. And at the 28-year mark, additional savings became irrelevant because all investors eventually reached the goal from natural portfolio growth with no additional savings at all.

Just like all financial metrics, savings rates also vary by both asset allocation and home country. So it’s always important to look at data that describes your own personal situation rather than jump to conclusions based on studies with critical assumptions that don’t apply to you.

Long story short, the Savings Rates chart is a highly customizable tool that can help all types of people establish actionable savings plans regardless of what portfolio they prefer, where they live, and how far along they are in their own investing journey. So if you have a financial goal and any question at all about what it will take to get there, fire up the Savings Rates chart and it should point you in the right direction.

Saving is the key to success


With so many different levers to pull, there are countless iterations of savings plans to study. Maybe you want to fund a long-term retirement, a mid-term college fund, or a short-term down payment on a home. All of those goals have different risk profiles and savings needs that may imply a variety of different investing choices. One day I’m sure I’ll come back to many of those situations in detail, but for now I’ll simply encourage you to explore them for yourself. After all, there’s no better way to learn how something works than to get your hands dirty.

But as one last parting message before you start tinkering, I feel moved to point out a detail that I think is really important.

While the examples above all use pretty big numbers like $100k in income and million-dollar goals because they make the example calculations easy to understand, I’m fully aware that numbers like that can feel unattainable for a lot of people. I’m blessed in so many ways, but I get it. I have humble family origins just like you, and I understand that financial advice written primarily for people who are already well off often rings hollow and out of touch.

So with that in mind, the default settings for the Savings Rates chart are chosen for a very special reason.

Let’s say you’re young, are new to the idea of investing, and have no real savings at all. We’ve all been there! Let’s also assume that you’re not a high-flying doctor, lawyer, or Bay Area software engineer. After all, most people aren’t. The median household income in the US is currently about $69k per year, but since that’s the median it means that there’s a decent chance your family makes less than that. So let’s round down and call it $60k as a realistic placeholder. Basically, you’re perfectly normal and in the same boat as the vast majority of people except with the initiative to be learning about this stuff and thinking about your future.

For everyday families, the idea of becoming millionaires sounds like a fantasy reserved for athletes, celebrities, business owners, and lottery winners. At the very least, lots of people naturally assume that getting there with investing requires bold action like chasing massively risky meme stocks, pouring money into the insanely volatile crypto market, or getting really lucky identifying the next Apple or Amazon before they get big. As a result, I see so many people lever up their investing risk because they feel like they have to in order to have any chance of ever becoming wealthy.

But you really don’t.

Look at the default Savings Rates chart and let it sink in. The portfolio is a plain and conservative mix of simple stock and bond index funds with no active trading at all. The starting value is zero. The annual salary is middle-class. And yet the data suggests that everyday people can print their own ticket to millionaire status (even adjusted for inflation) in no more than 25 years simply by saving a relatively modest 35% of their income.

Have you ever dreamed of winning the lottery? What if I told you that you have the power to flip the odds from one in many millions to virtually 100% just by thinking in terms of safe savings rates?

Now I’m definitely not saying that saving a third of your money is easy, but if you put your mind to it I believe it’s very attainable. And if you’re not there yet, that’s fine! Start with the minimum savings rate and you give yourself a fighting chance. There’s also nothing particularly special about accumulating a million dollars, as it’s not like it miraculously makes you a better person or solves all of your problems. The key point is not that it should be your goal, but simply that ideas that may seem like nothing but dreams today are absolutely within your reach. You just need a good plan to get there.

For all of the fixation on risk tolerance in investing, I believe the far more powerful factor affecting long-term financial success is an appreciation for the risk-mitigating power of saving. So I’d like to propose a challenge. Bottle up all of that nervous energy you pour into maximizing your investing returns, and commit to allocating it for a while to maximizing your savings rate. Cut back on purchases that don’t bring you lasting joy. Learn how to do things for yourself rather than always paying someone else to do them for you. Automate contributions so you don’t even have to think about it. Become an expert in keeping more of what you earn, and the investing part gets so much easier.

Saving may not be the glamorous side of finance, but trust me — it’s where the real action is. Take the time to give it the attention it deserves, and the return on that exercise will pay a lifetime of dividends that you won’t soon forget.


Did this help you recognize a clear path to financial success?