Author Topic: Retirement Advice - more poor advice from the mainstream  (Read 7828 times)

nereo

  • Senior Mustachian
  • ********
  • Posts: 10964
  • Location: Just south of Canada
    • Here's how you can support science today:
Retirement Advice - more poor advice from the mainstream
« on: January 13, 2016, 08:54:13 AM »
Saw this in today's Washington Post about new recommendations from Fidelity. Basically it's advocating that you have some percentage of your salary saved up by a certain point to be ok in retirement.  Getting past the assumption that a person shouldn't be FI/RE until age 67, there's some things that really leave me scratching my head (and yelling at my computer monitor)



1) apparently you don't need to have anything saved until age 30.... so little to nothing saved in your mid 20s?  guess they're counting on being in debt then

2) 3x your salary by age 40?  After being an adult for 22 years?  To understand how low a bar this is for people to aim for suppose you had a college educated worker who made ~$55k/year (close to the median).  If that person simply contributed to his/her IRA every year and earned a rather paltry 4.5% return they would hit this target.    He/she would be saving 10% of their salary.

3) 7x by age 55?  That's the 'danger zone' where you can be forced into early retirement, but still have an even chance of living another 3 decades.  Assuming 4.5% returns (as above) now were are talking about a savings rate of just 8%.

4) the ever-present assumption that savings should be a multiple of your salary, and by extension that your future spending should be tied to your present-day earnings.


Interestingly, I was initially very skeptical about the recommendation that a 67 would only need 10x their salary.  I ran a few numbers and came up with this:  Understanding that SS will kick in, a 67yr retiree will need their savings to last another 23 years to make to age 90.  THe shorter duration means that we can use a higher WR  - I chose 5.5% because it's success for 23 years is similar to 4% for 40 year time frames.  That gives $30k/year to the retiree, plus an estimated $23k/year from SS for working for 35+ years. This retiree would fit the assumption that spending will roughly equal their salary.


Edit:  Here's the link to the WaPo article: https://www.washingtonpost.com/news/get-there/wp/2016/01/12/how-big-your-retirement-fund-should-be-at-every-age-according-to-one-guide/?hpid=hp_no-name_hp-in-the-news%3Apage%2Fin-the-news
« Last Edit: January 13, 2016, 09:02:59 AM by nereo »

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Retirement Advice - more poor advice from the mainstream
« Reply #1 on: January 13, 2016, 08:58:24 AM »
Fascinating.  I can't find the article, can you link to it or tell us the full title?

The "save nothing in your 20s" thing always bothers me too, and I am a millennial who had six-figure debt.  It's not as easy to save in your twenties as it was a generation ago, but it seems like even saving $500/year between 18 and 25 is a good start.  That's more or less what I did (I finished graduate school and started work at 25).

nereo

  • Senior Mustachian
  • ********
  • Posts: 10964
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Retirement Advice - more poor advice from the mainstream
« Reply #2 on: January 13, 2016, 09:03:18 AM »
Fascinating.  I can't find the article, can you link to it or tell us the full title?


Link added to OP.

Travis

  • Magnum Stache
  • ******
  • Posts: 2594
  • Location: South Korea
Re: Retirement Advice - more poor advice from the mainstream
« Reply #3 on: January 13, 2016, 09:15:34 AM »
I don't find this too concerning.  Someone in their 20s ought to be trying to put some money away, but imagine how much more we as a society would feel secure if everyone stuck to even this plan. On this thread we tend to run into people whose entire retirement plan is SS and whatever is in their pocket when they're too old to work anymore.  This Fidelity plan isn't the end all be all, but it would be a hell of a start.

FrugalFan

  • Pencil Stache
  • ****
  • Posts: 910
Re: Retirement Advice - more poor advice from the mainstream
« Reply #4 on: January 13, 2016, 09:27:55 AM »
Actually, we are not quite at 3X by 40 (I am 39 and DH is 41) and are probably much better off than most of our peers. But we are both academics and started our first real jobs at 29 (me) and 31 (him). And our salaries have increased quite a bit so 3 times our salaries is a good chunk of change. And in the past three years we've not earned anywhere close our full salaries due to two parental leaves each and a sabbatical each. Nevertheless, I find the guidelines very strange and have no idea how they came up with those numbers!

Apocalyptica602

  • Bristles
  • ***
  • Posts: 271
Re: Retirement Advice - more poor advice from the mainstream
« Reply #5 on: January 13, 2016, 09:30:45 AM »
Wow, this is eye opening. My wife and I graduated with ~100k in debt between us which is now gone, and now have a net worth of almost 300k by 27.

By 30 we should be at close to 3x our (~$200K) HHI.

I certainly feel 'well off' but compared to the average person our age we're wildly rich, probably <1% of the age group.

That being said. I feel like if the average individual attained these numbers listed in the OP, they'd be 'okay' for average retirement at the age of 67 etc. The problem is I feel the average 30 year old doesn't even come close to having 1x salary saved up, and probably still has a negative net worth.

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Retirement Advice - more poor advice from the mainstream
« Reply #6 on: January 13, 2016, 09:31:38 AM »
I think 3X salary is different from 3X amount spent in a year for the more frugal types.  For most Americas, salary = amount spent in a year.  Following this guidance might put them in sort of an okay position, assuming they have the ability to flex their frugality muscles in retirement and cut spending.

It is telling that much of the article focuses on how this is a "punch in the gut" for many Americans.

This also gave me a good concrete net worth goal for 2016!  I want to have 3x my salary (which is currently about 6x my spending) saved in 2016 (age 30).

EDITED because I had a brain fart.  I can have 3x my post-tax salary saved, but not pre-tax.  Still 6x my spending.
« Last Edit: January 13, 2016, 09:47:03 AM by onlykelsey »

mizzourah2006

  • Bristles
  • ***
  • Posts: 473
  • Location: NWA
Re: Retirement Advice - more poor advice from the mainstream
« Reply #7 on: January 13, 2016, 09:42:08 AM »
Actually, we are not quite at 3X by 40 (I am 39 and DH is 41) and are probably much better off than most of our peers. But we are both academics and started our first real jobs at 29 (me) and 31 (him). And our salaries have increased quite a bit so 3 times our salaries is a good chunk of change. And in the past three years we've not earned anywhere close our full salaries due to two parental leaves each and a sabbatical each. Nevertheless, I find the guidelines very strange and have no idea how they came up with those numbers!

This is us too. We are at about 1.5x our salaries at 32 (me) and 30 (her), but I didn't even start full-time work until I was 28 due to a PhD program. I can pretty much guarantee no one in my cohort is anywhere close to where we are at our age. Also, I'm not sure what "savings" means. I'm assuming that's just in retirement accounts/brokerage accounts/savings. If you retire at 67 with 10x your salary and have a paid for home you will be more than fine. I didn't count equity in our home, if you add that we are up over 2x.

With more and more working professionals getting graduate degrees and with most graduate degrees bringing debt along with them I could see this as being reasonable.

LeRainDrop

  • Handlebar Stache
  • *****
  • Posts: 1841
Re: Retirement Advice - more poor advice from the mainstream
« Reply #8 on: January 13, 2016, 10:31:51 AM »
4) the ever-present assumption that savings should be a multiple of your salary, and by extension that your future spending should be tied to your present-day earnings.

The fourth issue nereo cited is the one that always bugs me about the retirement rules of thumb that get promulgated repeatedly in the mainstream.  onlykelsey's comment is spot on:

I think 3X salary is different from 3X amount spent in a year for the more frugal types.  For most Americas, salary = amount spent in a year.

Goodness, if I had 10x my salary saved at any age I would retire immediately!  I'm busting my hump in a high-pay/high-stress job, following many mustachian principles, precisely so that I can get out of dodge earlier in my life.  (I generally enjoy practicing my career, too, but the FIRE benefit is a major plus!)  There is absolutely no way that I would ever spend remotely close to my salary amount in a single year.

Magilla

  • 5 O'Clock Shadow
  • *
  • Posts: 83
Re: Retirement Advice - more poor advice from the mainstream
« Reply #9 on: January 13, 2016, 10:48:06 AM »
Is it really such poor advice?  Sure, it's not the best advice but it's not the worst either.  I mean you have to think of the audience, which is most definitely not the audience of this website.  If even half of Americans followed this advice it would be a HUGE improvement over the current status quo.  Yes it's dumbed down and pretty silly, but given the audience it has to be.

Even people here, the percentage that saw the light super early is small.  I know I didn't start getting my shit together until I was like 29 and only "discovered" that ER is really possible 6 months ago

FrugalFan

  • Pencil Stache
  • ****
  • Posts: 910
Re: Retirement Advice - more poor advice from the mainstream
« Reply #10 on: January 13, 2016, 11:24:44 AM »
I don't think it's poor advice. Most people should probably be saving more and having some kind of guideline is good, but I don't know where these numbers came from and as people have mentioned earlier, it's your spending rate that really matters, not your salary. We could easily retire on 5-6 times our salary, and will be reaching that well before 67. These numbers might scare people off, especially if they are in the upper age ranges and have saved very little or nothing at all yet.

bobechs

  • Handlebar Stache
  • *****
  • Posts: 1068
Re: Retirement Advice - more poor advice from the mainstream
« Reply #11 on: January 13, 2016, 11:35:55 AM »
The only income related rule-of-thumb that makes me want to hurl from all orifices simultaneously is the one about buying engagement/wedding jewelry.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10964
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Retirement Advice - more poor advice from the mainstream
« Reply #12 on: January 13, 2016, 11:54:43 AM »
The only income related rule-of-thumb that makes me want to hurl from all orifices simultaneously is the one about buying engagement/wedding jewelry.
LOL - we got married while I was in graduate school and techinically had no income.  So - 2 months salary x $0 = $0!

nereo

  • Senior Mustachian
  • ********
  • Posts: 10964
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Retirement Advice - more poor advice from the mainstream
« Reply #13 on: January 13, 2016, 12:07:35 PM »
Is it really such poor advice?  Sure, it's not the best advice but it's not the worst either.  I mean you have to think of the audience, which is most definitely not the audience of this website.  If even half of Americans followed this advice it would be a HUGE improvement over the current status quo.  Yes it's dumbed down and pretty silly, but given the audience it has to be.

I did struggle where to put this article, but a few things made me decide to put it here.  The recommendation that you need so little of your money saved by your mid-50s seems particularly dangerous.  I'm also deeply distrustful of their projected 3% returns.
If those do turn out to be accurate, then I see their recommendations for how much someone in their 60s should have is dangerously low. The lower your projected returns, the more you will need.

I agree that if more Americans followed this advice it would be an enormous improvement, but what I object to is that this is being touted by a large financial firm as defining a "good" retirement path.  Had it been framed as "this is the bare minimum where you ought to be financially, and if you are below this you have some serious catching up to do" and I'd be able to get behind it more.

I just see these kinds of recommendations as being borderline dangerous.

jinga nation

  • Handlebar Stache
  • *****
  • Posts: 1271
  • Location: 'Murica's Johnson
  • Left, Right, Peddlin' Shite
Re: Retirement Advice - more poor advice from the mainstream
« Reply #14 on: January 13, 2016, 12:23:17 PM »
That Fidelity retirement illustration (and Vanguard's, and Prudential's, and many others) may sow FUD into their clients. So clients will either save more, or feel that the goal is too lofty so why bother saving at all and just pull out. Or they'll say BS and ignore and continue with the existing contribution rate.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8011
  • Location: United States
Re: Retirement Advice - more poor advice from the mainstream
« Reply #15 on: January 13, 2016, 12:31:06 PM »
Fascinating.  I can't find the article, can you link to it or tell us the full title?

The "save nothing in your 20s" thing always bothers me too, and I am a millennial who had six-figure debt.  It's not as easy to save in your twenties as it was a generation ago, but it seems like even saving $500/year between 18 and 25 is a good start.  That's more or less what I did (I finished graduate school and started work at 25).

Have you really "saved" anything if you have debt to pay off? Or you've just set it aside to use it later for that debt?


/Yes, I recognize in some cases investing money makes more sense due to the returns than paying debt; but if you just stick it in an account to "save" it; I don't think you've saved anything if it's already been spent- on whatever that debt was taken out for.

Dezrah

  • Bristles
  • ***
  • Posts: 458
Re: Retirement Advice - more poor advice from the mainstream
« Reply #16 on: January 13, 2016, 12:41:48 PM »
These numbers are actually much higher than they were a few years ago.  They’ve obviously changed a boatload of assumptions.  Here’s what they used to be compared to what they are now:

Age   New Rule   Old Rule
30   1x      0.5x
35   2x      1x
40   3x      2x
45   4x      3x
50   6x      4x
55   7x      5x
60   8x      6x
67   10x      8x
Back when I first started trying to figure out how much I should be saving for retirement (approximately 4 years ago) Fidelity’s “Rule of Thumb” was actually the first useful thing I came across.  At the time we had “extra” money each month and I couldn’t decide how much should go toward retirement versus student loans.  Using these milestones as a guideline, I was able to show myself it was feasible to contribute a relatively small portion toward retirement and the rest toward the loans and still have an “average” expectation of retirement. 

I still use these as my “should the worst occur” milestone goals in my projections.  Like let’s say I had something come up that would cost me a lot of money over time (unexpected child, dependent relative, experimental medical treatment, whatevs), as long as I could still meet these retirement milestones, I would feel guilt-free about contributing financially toward this very important thing. 

Now I have to go back and update my spreadsheets though.

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Retirement Advice - more poor advice from the mainstream
« Reply #17 on: January 13, 2016, 12:49:12 PM »
Have you really "saved" anything if you have debt to pay off? Or you've just set it aside to use it later for that debt?

/Yes, I recognize in some cases investing money makes more sense due to the returns than paying debt; but if you just stick it in an account to "save" it; I don't think you've saved anything if it's already been spent- on whatever that debt was taken out for.

Hmm.  I guess at 18 I was definitely not running complicated analyses about the benefit of tax-sheltered savings, but I think saving money in an IRA while incurring student loan debt was actually a good bet overall.  Of course, hindsight is 20/20, I might not have gotten a wellpaying job at 25, or might have had some medical emergency that wiped out my savings, etc.  But in addition to the tax benefit of IRA savings, I think starting a rule about saving x% of every salary for retirement (even it was 5% of 10K/year for minimum wage work) was worth it.

beltim

  • Magnum Stache
  • ******
  • Posts: 2847
Re: Retirement Advice - more poor advice from the mainstream
« Reply #18 on: January 13, 2016, 12:52:15 PM »
Fascinating.  I can't find the article, can you link to it or tell us the full title?

The "save nothing in your 20s" thing always bothers me too, and I am a millennial who had six-figure debt.  It's not as easy to save in your twenties as it was a generation ago, but it seems like even saving $500/year between 18 and 25 is a good start.  That's more or less what I did (I finished graduate school and started work at 25).

Have you really "saved" anything if you have debt to pay off? Or you've just set it aside to use it later for that debt?


/Yes, I recognize in some cases investing money makes more sense due to the returns than paying debt; but if you just stick it in an account to "save" it; I don't think you've saved anything if it's already been spent- on whatever that debt was taken out for.

If your net worth has increased because of money deposited rather than investment returns, yes, you have saved.  It doesn't matter whether your net worth starts off positive or negative.

I just see these kinds of recommendations as being borderline dangerous.

Far more dangerous would be broadcasting to everyone that they need to save at Mustachian levels.  Why?  Because most people won't, and will discard the instructions entirely, and won't save anything at all.  This already exists at low levels based on these sorts of recommendations, and I think it's a well-studied effect in psychology, but I can't recall the name.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Retirement Advice - more poor advice from the mainstream
« Reply #19 on: January 13, 2016, 02:15:08 PM »

Have you really "saved" anything if you have debt to pay off? Or you've just set it aside to use it later for that debt?

Your phrasing is confusing.

I have some low-interest debt that I'm currently ignoring, for all effects and purposes. and I put away at least 50 grand last year with a NW increase of about 60K. Are you suggesting none of it counts until the debt goes away too?

Most people here categorize both debt payoffs and new investments as savings. Anything not spent/consumed is saved - what is done with it afterward is a separate issue.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10964
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Retirement Advice - more poor advice from the mainstream
« Reply #20 on: January 13, 2016, 02:30:29 PM »

Have you really "saved" anything if you have debt to pay off? Or you've just set it aside to use it later for that debt?

Your phrasing is confusing.

I have some low-interest debt that I'm currently ignoring, for all effects and purposes. and I put away at least 50 grand last year with a NW increase of about 60K. Are you suggesting none of it counts until the debt goes away too?

Most people here categorize both debt payoffs and new investments as savings. Anything not spent/consumed is saved - what is done with it afterward is a separate issue.
yeah, I'm similarly confused.  Despite having a lot in savings I took out a mortgage.  I still consider myself to have savings, even while having debt.  Likewise, I have a couple of student loans in deferment.  I keep adding to my 'stach and not paying those suckers off. 

simplertimes

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Retirement Advice - more poor advice from the mainstream
« Reply #21 on: January 13, 2016, 05:25:45 PM »
I suppose I am a good example of someone who has not saved the recommended amount by age 30.  From age 22 to 30:

- My husband and I graduated college with a combined $140k in student loan debt
- We bought a house (during the peak of the housing market) that lost 50% of its value
- We had an $18K wedding (including honeymoon)
- We became a single income family and had three children

This is pretty much the opposite of Mr. Mustache who waited until his thirties to have a kid, haha!

My point is that, for some people, their 20s is a time of very significant financial expenditures (college, house, wedding, kids).  These may be more/less expensive depending on the choices people make, but it's still a lot to handle over the course of 8-10 years.

robotclown

  • Stubble
  • **
  • Posts: 152
Re: Retirement Advice - more poor advice from the mainstream
« Reply #22 on: January 13, 2016, 07:17:34 PM »
Saving your annual salary every 5 years is a 20% savings rate, which is actually better than the typical mainstream advice.

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Retirement Advice - more poor advice from the mainstream
« Reply #23 on: January 13, 2016, 08:01:18 PM »
These numbers are actually much higher than they were a few years ago.  They’ve obviously changed a boatload of assumptions.  Here’s what they used to be compared to what they are now:

http://forum.mrmoneymustache.com/investor-alley/what-do-you-think-of-fidelity's-new-retirement-milestones/

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Retirement Advice - more poor advice from the mainstream
« Reply #24 on: January 13, 2016, 08:02:10 PM »
Saving your annual salary every 5 years is a 20% savings rate, which is actually better than the typical mainstream advice.
This is true but unfortunately not Fidelity's recommendation.

Edit:  Here's the link to the WaPo article: https://www.washingtonpost.com/news/get-there/wp/2016/01/12/how-big-your-retirement-fund-should-be-at-every-age-according-to-one-guide/?hpid=hp_no-name_hp-in-the-news%3Apage%2Fin-the-news
I was about to complain that the WashingtonPost misled readers (regarding how much income savings would replace) as well but I see they have listed a correction.
« Last Edit: January 13, 2016, 08:05:35 PM by JZinCO »

Apples

  • Pencil Stache
  • ****
  • Posts: 924
Re: Retirement Advice - more poor advice from the mainstream
« Reply #25 on: January 14, 2016, 06:09:32 AM »
I don't think savings 1x salary by 30 means you "didn't save anything" in your 20's...as long as we're talking about that number being for retirement, and not just general net worth.  I mean, doing some very rough math if you get a 5% pay raise every year from graduating college at 22 through age 30 (I'm using that as a proxy for a promotion, pay grade raise every few years when you start out), then a salary at 22 of $60,000 turns into a salary of $88,647 at age 30.  Saving 10% of your salary through that time with 7% returns (roughly, I'm doing that based on annual contributions not the actual monthly ones) gets you $92,000.  And you don't actually reach 1x salary until that last year!

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Retirement Advice - more poor advice from the mainstream
« Reply #26 on: January 14, 2016, 07:59:27 AM »
I don't think savings 1x salary by 30 means you "didn't save anything" in your 20's...as long as we're talking about that number being for retirement, and not just general net worth.  I mean, doing some very rough math if you get a 5% pay raise every year from graduating college at 22 through age 30 (I'm using that as a proxy for a promotion, pay grade raise every few years when you start out), then a salary at 22 of $60,000 turns into a salary of $88,647 at age 30.
correct, based on Fidelity's numbers they're solving for a future value where ror is 0.03, present value is 0 and contributions are .15 and number of periods are 5.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10964
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Retirement Advice - more poor advice from the mainstream
« Reply #27 on: January 14, 2016, 08:21:45 AM »
correct, based on Fidelity's numbers they're solving for a future value where ror is 0.03, present value is 0 and contributions are .15 and number of periods are 5.
I'll admit to using a bit of hyperbole by saying 1x earning is saving 'almost nothing' - but I don't agree with a period of 5 years.  A person can open an IRA as soon as they have earned income.  For many (most?) this will be when they are teenagers.   Adulthood legally starts at 18, most graduate college around 22.  Habits are formed early...

With This Herring

  • Handlebar Stache
  • *****
  • Posts: 1208
  • Location: New York STATE, not city
  • TANSTAAFL!
Re: Retirement Advice - more poor advice from the mainstream
« Reply #28 on: January 17, 2016, 11:44:47 AM »
With the assumptions they have stated in the article, I think the Fidelity thing isn't too bad.  It is assuming a 15% savings rate starting in one's early 20s.

Here is my super-quick workup of it:
https://docs.google.com/spreadsheets/d/1xS4pjg-T8hHmYJ0FPKDWnVCC-fsedIwVJAk-U-c2E9k/edit?usp=sharing  (Please tell me if the link doesn't work!  I have not used Google Sheets more than a couple times.)

My tax calcs are really simplistic (just assuming that all earnings over $10,300 will be income-taxed at the rates stated).