Home Finance Behavioral Finance Can Any Formula Tell You How Much Money To Save?
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Can Any Formula Tell You How Much Money To Save?

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We are led to believe that there is a way to properly prepare for any financial disaster. But in the current (rapidly changing) economic climate, is that still true?

Not too long ago I wrote about the “75k will make you happy article.” Now I have set some serious question marks next to that article, but I won’t dive into that here. Here, I would like to dive into an even stronger numerical plague: the amount of money you should have set aside, by age.

No one wants to hear that they are 5 years behind on preparing for their retirement. Actually, most people don’t want to hear about their retirement at all. But, knowing all this, there are several notable plans. One of my favourites is by Fidelity. According to them you should set aside (at least):

  • 1x your salary by age 30,
  • 3x your salary by age 40,
  • 6x your salary by age 50,
  • 8x your salary by age 60, and
  • 10x your salary by age 67.

There seems to be an underlying assumption here that you will retire at 67 (cute), that your salary will continue to grow as you become more senior (we remain hopeful) and that you will be able to save through your twenties and thirties (student debt I’m looking at you). Those three assumptions can kiss my @ss. I’m only slightly optimistic about the second assumption, as hopefully, we should be able to set aside more money from age 45 to 50, where salaries are usually relatively high. We hope.

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Fidelity also mentions investing, using the well-known (their words, not mine) 4% rule: if you have 10 times your last salary invested, you should be able to draw 40% of that last salary for the retirement of at least 30 years. Fidelity adds to that the value of your expected Social Security benefit (LOL) and the change in average spending patterns in retirement vs. pre-retirement. The latter is referring to the fact that most retirees own their houses and no longer pay mortgages and overall spend their money differently as compared to a 30-year old (fair). The former is assuming we get any benefits, which is becoming increasingly doubtful.

There are a lot of assumptions here that I’m really not too sure to apply to my generation. Let’s be real here. We know we are one of the first generations that will be worse off than their parents. And that does sting. Especially as we are massively in student debt as a generation.

My advice: don’t count on there being any money left from the government pot to be given to our generation when we retire (if we ever do). Don’t count on being able to own a house (and as such, your spending pattern won’t change as much as is assumed). Don’t count on being able to save a lot during your twenties and thirties (rent over 50% of my shit wage, is that you?), nor your fourties (hello student debt my old friend). And the kids will cost money too (if you want them, of course).

Now Fidelity isn’t the only one with a formula, or a guideline if you will. There is more! There is the “Millionaire Next Door Wealth Formula” brought to life by Thomas J. Stanley, PhD and William D. Danko, PhD. This one is riddled with even more assumptions, so let’s hit it:

“Divide the age of the main breadwinner in your household by 10, and multiply by your household income (they say that your Adjusted Gross Income, or AGI, is a good number to use).”

They even give an example to make sure you get the actual calculation: “say John, aged 52, is married to Jane, aged 55. Say Jane’s salary is higher than John’s, and together their AGI is $90,000/year. The formula says that they should by now have $495,000 set aside for retirement (= (55/10) x $90,000).”

Clear as ice.

You’re probably wondering how they came up with this formula: “The Wealth Equation was developed from national surveys of households with incomes of $80,000 or more. The typical millionaire is in his/her (let’s be honest: his) late 50s. In fact, in my most recent national survey, the typical millionaire was 57. Those who are significantly younger than 57 should be aware of the fact that the Wealth Equation overstates what they should actually be worth.

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Yes, a formula based on wage and age, which overstates at certain ages, and understates at others. Unsurprisingly, riddled with loopholes and assumptions. This formula will work if:

  • You’re old enough to have had some time to save and invest for retirement (say 50 or older, and the closer to retirement the better).
  • Your income is high enough to let you to set aside at least 10% of your income (more is better).
  • Your income hasn’t recently increased by a large factor.
  • You’re not planning to significantly change your standard of living in retirement.
  • Leaving a large bequest isn’t a significant driver for your retirement plan.

This formula will run into issues if:

  • You’re in your 30s or younger (I’m already disqualified from participating)
  • You make so little money that you need to be on benefits.
  • Your income recently doubled or tripled relative to what it was before (let me dream). The formula runs into issues because it will take you a while to “catch up” to what your savings should be on the new income.
  • You’re saving and investing a massive fraction of your earnings. For example, if you’re earning $75,000 and setting aside $30,000 of that each year, what you’ll need to replace at retirement is much smaller than most people making the same income as you do. This is often seen with the FIRE movement.
  • You plan to live more frugally in retirement than most people who make about the same income as you do. Again, this is very typical with FIRE.
  • Or the reverse: you’re planning to go from a frugal lifestyle pre-retirement to joining the jet-setting crowd once you retire. If you want to (at least) triple your annual spending, you’d better have a lot more set aside than the Wealth Formula suggests!
  • You want to leave your kids or a favorite charity a (huge) bequest. Most retirement plans work on making sure you don’t outlive your nest egg. If you want to leave millions to your inheritors, you’ll need to have those millions in the first place.

So yeah, not too reliable that one. Don’t feel bad if you’re not yet that 57 year old millionaire. I’m neither a millionaire, nor 57. It is what it is.

If you’re not tired of my sarcastically going through these formulas, I’ve got another one, this one is by Kiplinger. Set aside at least:

  • 0.5x your salary by age 30,
  • 2x your salary by age 40,
  • 5x your salary by age 50,
  • 9x your salary by age 60, and
  • 11x your salary by age 65.

It seems nicer, as Kiplinger at least realises that when entering the workforce, we won’t be setting aside any money, as our rent will almost wipe out our entire wage, not to mention the repayment of student loans. Not only did they look us for us, but they looked out for everyone else too: they also provide ranges around the above numbers. For example,

  • 3.5x to 6x your salary by age 50,
  • 6.5x to 11x your salary by age 60, and
  • 8x to 14x your salary by age 65.

I should have mentioned this beforehand, but all those critiques of the Wealth formula, as in, the formula doesn’t work for quite a lot of people, well, that issue applies to all the formulas mentioned above. I just wrote that part first. Sorry!

Is there any point to me unashamedly bashing a whole bunch of formulas, including one from a bestseller? Yes, of course.

Except for getting rid of some of my frustrations (I’m a snowflake who is apparently undersaving), my main concern here is that these formulas are out of date. I’m not going to say “Okay Boomer, Whateverrrrr,” but I’m pretty close to saying it.

My generation isn’t going into the job market with stable, longer-term contracts. No, we are flex-workers and freelancers, because that is all the market is currently providing us with. Our wages aren’t stable, neither is our work. We are massively in debt (mostly student, consumer debt is of generations before us), and struggle to obtain property. We are flat out broke. And if we ever reach retirement age (we might die before it), will there be any money left?

I don’t need a formula to tell me I should be saving more for retirement. I don’t need the condescending statement “Well, if you’ve got anything set aside for retirement you’re way ahead of your peers.” I need someone to change the system, which is very rigged against my generation.

The generations that came up with these formulas and abided by them royally fucked my generation over. How does the formula apply to that?

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Merle van den Akker
Merle van den Akker is a PhD student in Behavioural Science, at the Warwick Business School. She studies the effect different payment methods, especially contactless and mobile methods, have on how e manage our personal finances. In her "free" time she writes articles on personal finance, behavioural science, behavioural finance and life as a PhD student, these are all published on Money on the Mind. With DDI, she writes on personal and behavioural finance, to ensure that knowledge from academia trickles into the mainsteam, and can help as many people as possible!

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