Global Savings Rates: What OECD Data Reveals About Financial Independence
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OECD Savings Rates: Insights for Achieving Early Financial Independence
The goal of the personal finance posts in this blog is to increase financial literacy and to set you on the path of financial independence. The simple idea behind reaching financial independence is to save as much as you can and to invest it, so you can eventually live off those investments without being dependent on employment. For most individuals, financial independence is achieved by the traditional retirement age, allowing them to live off a mix of pensions, savings, and passive income from investments. However, for those who strategically plan and optimize their savings, early financial independence can be achieved well before the traditional retirement age.
For an overview of the simple (but not easy) steps needed to get started on the journey to financial independence please read the previous post “Start your financial independence journey”. As discussed, the idea of achieving financial independence is not to stash your hard-earned money away for the sake of it, but to gain freedom of choice so you can focus on what really matters to you. A second recommended read is our post “Track and optimize your savings rate for financial independence”, where we outline a simple approach you can use for tracking your expenses and optimizing your savings rate.
In this post, we explore the household savings rates across OECD countries and what they reveal about achieving early financial freedom. What do these household savings rates indicate for those striving to achieve early retirement and financial independence?
Understanding Global Savings Trends and Their Impact on Financial Independence
To address the above-mentioned question, we draw on OECD’s net household saving rate data (henceforth, savings rate), i.e., total amount of net saving as a percentage of net household disposable income. According to the official website, this rate “thus shows how much households are saving out of current income and also how much income they have added to their net wealth.”
As observed in the figure below, average EU households display a concerningly low savings rate of 6.1%, well below what’s needed for financial security and early retirement, . There are substantial differences across EU countries, but the overall picture is grim nontheless. Sweden, Netherlands, and Germany presented the largest savings rates in the EU in 2019 with 15.5%, 12.0%, and 10.8%, respectively. Meanwhile, at the other end of the spectrum, Lithuania, Portugal, and Greece produced savings rates of 0.1%, -2.2%, and -10.1%, respectively. The negative values mean households’ average final consumption expenditures was larger than the net disposable income. In essence, households in these countries were consistently reducing their net worth, making financial independence even more challenging.
OECD (2023), Household savings (indicator), for a selection of OECD countries. Net household saving rate is the total amount of net saving as a percentage of net household disposable income.
What are the dynamics of these countries over time? Some EU countries have experienced large increases in saving rates over the years, e.g., Sweden managed to increase its savings rate considerably, from 0.4% in 2000 to 15.5% in 2019. In contrast, other countries such as Portugal reduced their savings rate from 6.1% to -2.2% over the same period. A third group of countries present remarkably constant savings rates over time, namely France and Germany–there are barely any variations over the 2000-2019 period for these two countries.
Outside the EU, household savings rates remain low, further complicating the journey toward financial independence and early retirement. The best savings rates in 2019 were recorded in Switzerland (17.3%), Mexico (15.6%), Australia (12.2%), and Chile (12.0%). Meanwhile, the worst performers were UK (-0.7%), Canada (2.0%), and New Zealand (3.1%). The US presented a 9.1% savings rate, slightly above the EU average.
The data shows that reaching financial independence before the conventional retirement age is not on the cards for most. The savings rates presented across countries are indeed very disappointing: people living in low savings rate countries risk relying too strongly on social security pensions. It is risky because the amount of pensions retirees will receive in the future is likely to be lower than what retirees enjoy today, resulting from the phenomenon of aging populations across OECD countries. The consequence is that retirees’ lifestyle may take a strong hit as they they exit the workforce.
How long would it take to achieve financial independence using the current savings rates in different OECD countries? When we examine the best of cases–Switzerland’s 17.3% savings rate–in this financial independence calculator, we observe that it would take 39.8 years to reach financial independence, i.e., close to a full working career. Remember that this is the best of cases!
How Optimizing Your Savings Rate Shortens the Path to Financial Independence
What would happen though if you managed to optimize your monthly expenses and increased your savings rate? The graph below illustrates how long it takes to achieve financial independence based on how aggressively you increase your savings rate. I use the financial independence calculator referenced above. Assumptions made in these calculations are disclosed at the end of the post.
The number of years it takes to reach financial independence (y axis) depends on your savings rate (x axis).
We observe that there is a non-linear relationship between savings rate and years to reach financial independence. Notice that the graph is a curve, not a straight line. This means in practice that sometimes small improvements in the savings rate can have a very large impact on shortening the timeline to financial independence. Here are some examples:
Saving 20% of your take home pay would allow you to reach FI after 36 years and, therefore, to retire about 5-7 years before conventional retirement age
Saving 30% of your take home pay would allow you to reach FI after 28 years and, therefore, to retire about 13-15 years before conventional retirement age
Saving 40% of your take home pay would allow you to reach FI after 21 years and, therefore, to retire about 20-22 years before conventional retirement age.
Saving 50% of your take home pay would allow you to reach FI after 16 years and, therefore, to retire about 25-27 years before conventional retirement age.
At the end of the day, the savings rate is a critical ingredient for reaching financial success. It is important to understand that someone with a very high income but low savings rate will take longer to reach financial independence than someone with a modest salary but implementing an aggressive savings rate. If this concept is not clear to you, I’d encourage you to play around with different levels of income, expenses, and savings rates with the financial independence calculator referenced above.
Of course, retiring early is not everyone’s objective. For many, enjoying a career of part-time work would be the goal, reducing stress levels, and improving work-life balance, by freeing up a lot of time to pursue a myriad of other interests.
Data and Assumptions Behind Savings Rate Calculations
The household savings rate data in this post comes from OECD’s comprehensive database on savings trends across member countries. It represents the total amount of net saving as a percentage of net household disposable income. It therefore shows how much households are saving from their current income. The data is available for most countries for the 2000-2021 period, with some countries also presenting 2022 figures. However, given that there is a very clear and strong distortion in the 2020-2021 period data as a result of the pandemic in this post we considered only the pre-pandemic 2000-2019 period.
The years to financial independence estimated in the graph and text above use the following assumptions: 1) an annual return on portfolio investment of 5%, which is a fairly conservative assumption if you invest passively in broad-based index funds, and 2) a 4% withdrawal rate. This second assumption means that when you achieve financial independence you cover your annual expenses by drawing 4% or less of your portfolio each year.
Enjoyed this post? Don’t miss our insights on optimizing your savings rate for accelerating your timeline to financial independence or on the important frugality lessons from Vicky Robin’s bestseller ‘Your Money or Your Life’.
Photo by Lance Asper on Unsplash.
