Aaaaaaggghhh! I would like to dope slap whoever originated the idea that every age has A Number.
But this is still one of the most common questions I get, in webinars, in Facebook conversations, from prospective clients, and from clients. Understandably, people want some sort of benchmark, something to tell them they’re doing okay, or even not okay. Knowing is so much better than not knowing.
Now, Google will probably serve you up a million articles that tell you how much you need to have saved by the age of 30 or 40 or 45. And, you know, these usually aren’t bad, but they’re so utterly divorced from you personally, that I think at best they’re kind of useless.
Why These “Save $X by Age Y” Rules Aren’t Helpful
A typical piece of advice is that you have, say, 1 x salary saved by the age of 30.
Let me count the ways in which this is a useless piece of advice.
- It assumes a specific path for your life going forward. Who knows if it’s the path you’ll actually follow? What if that number is for a (mythical) person who wants to retire at age 65 after having the same income every year for their entire working life? And you, on the other hand, want to retire at 55, or take a year-long sabbatical, or change careers? How is that number remotely applicable to your situation?
- It assumes a single path leading up to this point in your life. Let’s say you’re 30. Let’s say you got out of grad school when you were 25, 5 years ago, and have been working ever since. Would you expect to have the same amount of money saved up as someone who took a job right out of college? I certainly hope not.
- The younger you are, the more useless these numbers get. You’re saving for retirement, right? If you’re 30, retirement (or “work optional” as I have recently learned to call it…isn’t that great?) could be 30+ years away. There really is no earthly way of knowing what the hell is going to happen to you, to the economy, to the markets over that many years. But those assumptions are absolutely built in to these kinds of recommendations.
Why These Rules of Thumb Can Be Harmful
Unfortunately, I think those sorts of rules of thumbs can be not just useless, but harmful.
A healthy financial life depends more on managing your own emotions and behaviors than on manipulating numbers or understanding the tax code. And looking at these numbers can change how you feel and therefore behave, for the worse.
Maybe you look at such a number and feel like crap because you don’t have that much money yet. You get discouraged (“I’m such a loser! I can’t do this money stuff!”) and stop paying attention to your finances. Well, that’s not good.
Or maybe you do have that much money, maybe even more, and you decide hey, you can slack off for a bit. When in fact what you need for your life is to double down on saving.
I don’t know! But neither do these freaking articles going about recommending specific savings levels by age! It’s preposterous!
Other Questions I’d Rather You Ask
So, yes, in a way, this does all boil down to that extremely annoying “It depends.”
It doesn’t mean you have to hire a professional to figure out what it depends on or what “your number” is. But it does mean you have to sit down and think about the details of your situation. When did you start working? When did you start saving? Do you need to cut yourself some slack, or maybe increase your contribution to your 401(k)?
And, most importantly, What are you saving for? When do you need that money? If you want to buy a home in Seattle in 2 years, you’re going to need around $200k or more for a downpayment, regardless of your age.
Instead, How About “How Much of My Income Should I Be Saving?”
And if we’re going to stick with rules of thumb, I think a much more useful one is “save at least 15% of your income.”
I think that’s a pretty easy one to understand. We’re talking 15% of your total earnings, including all that juicy stock compensation, before taxes. That 15% is based on the idea that you start saving 15% when you get your first job and then save that every year until you retire, at, of course, age 65. So, for most of us, you’re only ever going to adjust it upwards, if you want to retire earlier, or if you started saving later.
But that is at least a good baseline. In part because “saving more” is rarely a bad approach to things.
Focus on Your Career Instead
If you’re young or otherwise far away from that “work optional” phase of life, you’ve got a lot of working—and earning!—years left. These “save $x by age y” rules ignore the importance of developing yourself professionally, and the outsized impact that can have on your earning and savings ability later. They make us focus on having a certain dollar amount by a certain age, which just isn’t helpful.
And the younger you are, the less helpful that is. I’d much rather you have less money by age 30, but have a certificate or degree in your line of work or have attended meaningful conferences and networked with others in your specialty, than have more money and be professionally weak.
If you’re saving at least 15% of your total income, then I think you can pretty safely ignore these “Save $x by age Y” rules. And you can certainly ignore them if you’ve done your own work, and figured out what your specific situation requires.
I generally think rules of thumb are better than nothing. But this particular one just chaps my hide. I encourage you to find a better way to gauge whether you’re doing okay.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.