A few weeks back Jean Chatzky almost broke the internet with a Tweet.
That’s a lie.
Tweets about retirement guidelines from personal finance gurus have zero percent chance of breaking the internet. However, it got a lot of discussion and a lot of retweets. Check it out:
By the time you’re 30, aim to have 1x your annual income set aside for retirement. At 40, 3x; at 50, 6x; at 60, 8x; and by retirement, 10x.
— Jean Chatzky (@JeanChatzky) November 1, 2017
It took me a minute to decipher the punctuation in that Tweet. To make it a little easier, here’s a table with some examples of a several annual incomes and the milestones.
I figure that if you make over $100,000 a year, you can probably do your own math, fair?
I spent some time reading the comments on Twitter. I didn’t spend a lot of time, because as everyone knows, Twitter comments aren’t generally fruitful. However, I wanted to get a flavor for what people were saying.
I came away feeling like most of the people in the 26-35 age range weren’t near the guidelines. That’s putting it nicely. The reaction seemed to be more like this:
There was some great sarcasm like how they ate too much avocado toast, or that their latte habit is killing their retirement dreams. These people at least knew some personal finance/current events. Another comment wisely pointed out he should just avoid all income and retire right away. His plan B was to reject all future raises as they’ll push out his retirement goals.
Maybe Twitter comments aren’t so bad after all, right?
My feeling is that millennials are saddled with student loan debt. That can make the first milestone or two very difficult. Just this morning, Quartz had an article about millennials will face worse income inequality than previous generations. That’s another way of saying that the rich get richer and the poor get poorer.
However, I think we should pause and realize that these are rules of thumb. Rules of thumb are not meant to apply to everyone or their unique situation. To make it even more imperfect, Chatzky wrote “aim.” I aimed for my first born to speak fluent Chinese by the time he was 3. It didn’t happen. (To be fair, that’s at least partially on me for not exposing him to Chinese.) However, he just turned 5 and he’s got a solid grasp of about 50 Spanish words and 50 sign language words.
The beauty of aiming high is that, even if you fail, you come out better off than if you never aimed at all.
Why not try to use this rule of thumb as a tool? If you are 30 and you only have 50% of your income saved, try to make a plan to get the 1x multipler by age 33. Then try to get to the 2x by age 36. Then try to get to the 3x multiplier by age 40 to be where the guideline is.
This may sound tough especially with mortgages, car payments, kids, etc., but a 10-year plan allows you to make meaningful changes over time. Could you live in a smaller, cheaper home in a different location? Could you drive your existing car longer or buy a cheaper one next time? Do your kids really need clothes? (Okay, scratch that last one.)
You might be surprised how a gnarly problem can look in hindsight. After all, this happened:
Photo Credit: My dog Jake. Thanks for reminding me that an unplanned event can be turn out better than the planned one.
Her numbers seem reasonable– for someone without a defined benefit pension.
True her basis is wrong, what matters is expenses not income, but most people know their income more accurately than their expenses. If we assume annual spending is, say 70% of pre-tax income, and social security covers, say 30% of pre-tax income, then you’d need 40% of pre-tax income to maintain the same standard of living when paychecks stop. If ‘safe withdrawal rate’ is 4% per year, then the 40% nest-egg income divided by 4% per year is — 10 years.
Yes everybody’s case is different, but when the majority of pre-retirees are below this target by half or more, it won’t be just a few outliers who come up short. Agreed it’s not the end of the world, you could reduce your living expenses when you retire, or you could withdraw 8-10% per year and hope for a prolonged bull market in whatever you’ve invested in. Most likely more people will decide not to retire until they reach their number (maybe in their 70s) or they’re physically unable to continue working.
I think if you are going to use income, which is not particularly rational as freebird pointed out, then you should use something like a five year moving average of your compensation if you have highly variable compensation. My total pay varied by as much as 100% from a low year to a high one since I was a corporate officer and received bonus and stock options that were larger than my actual salary some years and didn’t show up at all other years.
Lazy Man says
I agree with you both freebird and Steveark.
How much you have saved doesn’t mean anything unless we know how much you are spending. It’s like knowing the numerator, but not the denominator in a fraction. We’ve been looking to limit our expenses in the future by owning our home with solar panels. Hopefully, we won’t be paying for kid care or my wife’s online MBA that we have now either. So just like what Steveark was saying about using your average income… I calculated our average expenses over the next 45 years as well.
Michael Dinich says
Hello Lazy Man
I’m not sure I follow how this will work unless the retiree can earn 10 percent annually net of fees or is only planning on retiring for ten years.
In the example of someone making 35k a year, I doubt 350k will produce sufficient income to replace their retirement income and I doubt the can cut their expenses sufficiently to make it work. Using the 4% rule and factoring in Social Security, a person would need nearly 700k opposed to 350k. That’s being generous as many academics suggest the 4% rule should be revivesed to 2.9% or lower.
As you suggested, its best to use conservative estimates, as well as reasonable rates of return.