I woke this morning to an article describing the “magic retirement savings number.” It was enough to make me jump out of bed and review our household balance sheet.
Eight. Eight is the magic number. When you’re done working, if you want to retire, you may want to have about eight times your final annual salary in savings or retirement, in order to maintain the lifestyle to which you’ve become accustomed.
The number, established by Fidelity Investments, can be broken down into age-specific milestones: “By age 35, your goal is to save an amount equal to your annual pay. By 45, you will want to have saved about three times your salary, rising to five times your salary by 55.” (It’s important to note that Social Security benefits will go down over time, as the article suggests, and private or public pension funds could help, but those contracts can be changed or eliminated if history or new developments are any guide.)
My husband is 40, and I’m 42. So I’ll estimate that at this point in time, we need to have in savings about twice our household income. Good to know.
Then, I read the comments section of the article. It was… illuminating. Highly sophisticated readers with a significant command of numbers, their own financial numbers in particular, weighed in on the discussion. Not surprisingly, political philosophies came into play. Many people who have worked very hard and saved their money do not want their money taken from them in taxes. There’s a chance that some (many?) of these same people may not like the idea of supporting, through their tax dollars, others who have not saved.
The median income in the United States is $50,054, according to 2011 U.S. Census Bureau data.
Let’s consider those that are making twice the median income — about $100,000. Seems wealthy. Is it? According to Fidelity Investments, at 40, you should want $200,000 saved. At 45, about $300,000. And at 50, about $400,000.
Perhaps like me, you have some friends out there in those age groups, making around that number.
How many families–earning around $100,000, between the ages of 40 and 50–have done and are doing what they can, individually, to save responsibly for their future economic independence?
I’m trying to figure out that number. I’m trying to figure out how that number relates to the same number of voters who are likely to vote for one candidate over another. I’m hoping that the number is no more than equal to the number of likely Romney voters. That would mean voters are voting in favor their own economic interest–in that their economic interests will be safe from the likely effects of Romney’s domestic policy.
But I have a feeling that the numbers are not equal. I have a feeling that among higher earners (say between $100,000 and $200,000 in household income), likely Romney voters outnumber those are both low-spenders and big savers.
It’s disquieting. And it’s why political discussions are so complicated. I mean, it’s not like I can ask the guy down the street who wants to keep all his money and hates being taxed to the point of blind rage, “Exactly how much do you have, that you can imagine never being in need?”
Diary of a Corporate Wife 
The thing that’s always puzzled me is why you’d aim to match your preretirement consumption level. After retirement, you have a ton more leisure, which you can substitute for cash outlays, for example by cooking rather than eating out and doing your own home repairs, etc. I think those rules of thumb are kind of meaningless.
I’m going to blog on this at some point. I think we’ve made a conscious or unconscious choice to all work our asses off in the US. That actually might make sense if we think we can make up the time we spend at work in a long leisurely retirement. A significant cut in consumption of market goods and services would seem to be amply compensated for by finally getting to consume the thing we sacrificed all through our working years–free time.
Thanks Len, I look forward to your blog post!
I think what’s driving a lot of my puzzlement is the general level of savings among kind-of-higher earners, (between $100-200K), retirement aside: just saving, putting away a 3- or 6-month reserve for emergencies. They’re working their asses off, as you say, but there seems (based on what my little sphere of friends say) to be a share who are spending their asses off too, unnecessarily–though I do understand that consumer debt is down nationally. Within that share of spenders are Romney supporters–the group that baffles me, in that their economic behavior doesn’t match the economic policy (such as it is) of Romney. Maybe I’m turning into Suze Orman. (But my hair is longer and my teeth nowhere near as pretty.)
Additionally, some of the assumptions for investment growth and long term income streams are largely based upon investment biases forged in the past 40 years of primarily domestic investment. We now have a situation where the USA will likely not have explosive growth as it ddi in the past and many people are not psychologically prepared for the risks involved in building a portfolio to that size or looking to overseas investments which will likely outpace many traditional domestic equity or bond yields.
Buy the house in Mexico or Costa Rica while you can and hope for good health.
Good post on a topic people have a hard time coming to terms with. Every kid should have to learn the concept of paying themselves first with their first paycheck.
Thanks Jack! Good to hear from you. And yes, every kid should have to learn the concept of paying themselves first. PNC Bank worked with PBS last year, to sponsor/develop a cool educational tool on that, with the gang from Sesame Street. Our kids dug it. I did too!