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Is 2X Your Salary a Good Retirement Goal?

September 14, 2007 by Lazy Man 14 Comments

Boston Gal’s Open Wallet asks do you have two times your income saved for retirement? The most interesting part of the article was concept of a crossover point your retirement savings. The crossover point is when you make more from compounding interest than you do from new contributions. This happens when you have two times your income saved.

hill.jpgI had never really thought about it in this way, but it won’t change how I contribute to my retirement. I have about 35 years left until I reach traditional retirement age. I calculate that I’ll make about 5% each year after investment fees, taxes, and most importantly – inflation. Thus, I figure if I put in $15,000 in retirement this year, I will have over $82,000 in buying power at age 66. Next year, I will think of that contribution giving me buying power at age 67. I’m doing better than this because I’ve putting money for my retirement almost ten years ago. The math with each year now translating to one in retirement isn’t exact. Towards the top of the hill, I may find that I can live off the investment gains. I think of this philosophy as building a hill up until the point of retirement. The bigger the hill the longer I can coast down in my retirement.

As for the crossover point, a year ago, I might have been closer, but with the increase in my income over the last year, I fall short. I’m almost exactly at 1X my income. I’ll happily postpone my retirement crossover point party if I can keep increasing my income.

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Comments

  1. RateLadder says

    September 14, 2007 at 11:27 am

    I strive to push out the retirement cross over point as far as possible while never decreasing my cash flow. That is a much better goal than achieving the retirement cross over point.

    Reply
  2. guinness416 says

    September 14, 2007 at 11:54 am

    It’s perhaps a useful interim goal, a smaller amount that’s dfinitely more psychologically manageable.

    Reply
  3. rstlne says

    September 14, 2007 at 12:05 pm

    I don’t know about that. I think I need at least 10 times my income in today’s dollars just to be on the safe side.

    Reply
  4. Patrick says

    September 14, 2007 at 5:27 pm

    I only wish I knew how much I will need in retirement. I still have well over 30 years before I reach retirement age also, so I think I have plenty of time to grow my funds.

    It is usually much more difficult to be 2x your current salary at a younger age as well – because your investments haven’t had time to benefit as much from compound growth. I’m not sure if I am at the 2x pace, but I think I am doing well for my income level and age.

    Reply
  5. Brip Blap says

    September 14, 2007 at 7:27 pm

    Maybe I’m doing something wrong, but I have just over twice my income saved and I can’t even begin to imagine how I could live off the interest. I understand that isn’t the point, exactly, but I’m shooting for something more in the range of 20 times my current income before I could really kick back and enjoy for whatever was left of my life at that point.

    Reply
  6. Pinyo says

    September 15, 2007 at 1:52 pm

    “I figure if I put in $15,000 in retirement this year, I will have over $82,000 in buying power at age 66.”

    I never thought of retirement investing in that term. I think you’ve got some cool and motivating idea there.

    Reply
  7. MoneyNing says

    September 17, 2007 at 9:18 am

    Unfortunately, two times the income saved is not nearly enough for retirement :(

    Reply
  8. Early Retirement Extreme says

    February 21, 2008 at 10:27 am

    This is too crude a calculation.

    Investment income = rate * investments
    e.g.
    10,000 = 10% * 100,000

    Contributions = savings rate * wage income
    e.g.
    10,000 = 20% * 50,000

    So the idea holds more or less if one takes a pedestrian (20-30 years to retirement approach) with savings rates of 15-20% and market returns of 7-10%.

    However, this crossover point is CERTAINLY NOT a retirement goal just like the point when investment income equals the cable bill (instead of the IRA/401k contribution) is not a retirement goal.
    Rather it’s about one third of the way there in time and only 8% there in terms of money (if the ROI holds). In other words, for those that are pursuing standard retirement, this crossover point is a goal they should reach about 10 years after they started working.

    The real retirement goal is

    investments = 25 to 35 * retirement expenses

    Reply

Trackbacks

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  2. » Weekly Roundup: I Don’t Get Political Donations on Blueprint for Financial Prosperity says:
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  3. Retirement Goals, Savings Index, Credit Card Secrets: The Roundup » Money and Personal Finance Blog In Silicon Valley says:
    September 16, 2007 at 6:49 am

    […] interest than you are from your retirement contributions, you’ve reached the crossover point. I think I should be there already based on this guideline, but I’ll need to confirm […]

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  4. Roundup for week of 9 September 2007: Arturo Sandoval edition at Mighty Bargain Hunter says:
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