Savings Rate is the most important number to track as you are working to build wealth. It represents how much money you earn compared to how much you keep. You can track your savings rate per month or per year, but a recent episode of the Choose FI Podcast got me thinking about a longer view of savings. The episode focused on The Language of Business and how to understand financial statements including a balance sheet. Retained earnings is a total of how much a business has been able to keep after paying expenses over the lifetime of the business. Your personal retained earnings are the same thing as your Net Worth which represents how much wealth you’ve been able to keep and grow. But everyone has a different starting position and people earn different amounts of income over their lifetime. I wanted a way to judge how well I was doing compared to my income rather than just comparing someone else’s net worth number to my own.
Retained Earnings Rate = Net Worth / Total Income
In the United States, the Social Security Administration keeps track of how much income you earn from salaries to determine how much social security tax you pay, and how much you will receive in social security payments in the future. You can view your own lifetime salary income at https://www.ssa.gov
Create an Account if you haven’t done that or just Sign In if you’ve used the site before.
After you’ve got your account setup or you’ve signed in, scroll down to the Eligibility and Earnings section
Click on Review Your Full Earnings Record Now.
On the Earnings Record page, you will find a chart that shows your complete income history. Social Security Taxes are capped around $140,000 per year so if your income is above that number, make sure to use the numbers from the Medicare Earnings column which is not capped.
Total up the income from each year in a calculator or spreadsheet to find out how much money you’ve earned from salaries over your lifetime. You may be shocked at the size of the number if you’ve been working for 10 years or more. If you earned $50,000 per year for 10 years, that’s a half a million. Earn that for 20 years and you’ve had a $1 million in income pass through your accounts.
Next, take your Net Worth and divide by the total lifetime income. This will give you a very rough estimate of lifetime savings rates. It doesn’t consider taxes that were owed, and it doesn’t consider any growth from invested savings. This Retained Earnings Rate provides a personal measure of how much you’ve been able to capture from your income stream.
| NET WORTH | / | LIFETIME INCOME | = | SAVINGS RATE |
|---|---|---|---|---|
| -$50,000 | / | $500,000 | = | -10% |
| $100,000 | / | $500,000 | = | 20% |
| $500,000 | / | $500,000 | = | 100% |
| $1,000,000 | / | $500,000 | = | 200% |
What is a good Retained Earnings Rate? Consider someone who has a negative or zero net worth. Using this formula, you could earn $1 billion dollars and still have a zero Retained Earnings Rate. That means you are spending everything you bring in, and maybe more.
A retained earnings rate over 100% would indicate that your wealth is more than the total income you ever earned. If you inherited a $10 million mansion and only worked a minimum wage job, your retained earning rate would be over 100% which doesn’t tell you much about your ability to save. A teacher who worked to save 20% of their income every year and invested that in growing assets, could also have a retained earnings rate over 100%. They have accumulated wealth by investing a portion of their income over time.
Most people will fall into the 0% to 99% range as they are building wealth. If you are a diligent saver very early in life, your rate might be high. Incomes typically rise over a lifetime so even if you didn’t start out as a saver, you can save larger amounts later and have a higher rate. If your rate is low, don’t despair. Retained Earnings Rate is just one way to measure savings and it gives you a goal to improve and measure against going forward. Lower rates could indicate you don’t have a lot of room in your budget, and you may need to either increase your income or decrease expenses.
I calculated my Retained Earnings Rate out of curiosity. Now that I know what my rate has been in the past, I’m curious to check in on it occasionally, to see how my dedication to saving and investing moves the needle. Because this is a lifetime rate, a long work history means changes will be slow as your past behavior is averaged out with your current behavior. If you’re just starting your career, you can change the rate quickly by changing your annual savings rates through higher income and lower expenses.