Less than Twice My Salary Saved by 35? Am I doomed?

By 30, you should have a decent chunk of change saved for your future self, experts say — in fact, ideally your account would look like a year’s worth of salary, according to Boston-based investment firm Fidelity Investments, so if you make $50,000 a year, you’d have $50,000 saved already. By 35, you should have twice your salary, the firm said. – Marketwatch article citing Fidelity Investments advice

There’s been quite a bit said and written in response to this article.  Let’s take a closer look…

According to the U.S. Bureau of Economic Analysis, the average personal savings race in the U.S. is currently 3.1%.  Over the past 20 years this rate has averaged around 5%.

The Federal Reserve Bank has a handy chart of personal savings rate trends dating back to 1959 as seen below.  There is probably enough data in this chart for its own post.

Pull the scroller bars all the way to the right to get a closer look at the most recent data.

So when Marketwatch published an article citing advice from Fidelity Investments to have twice your salary saved by age 35… the wave of disbelief, denial and mockery, that swept social media seems a bit more understandable.

Why does this goal seem so unrealistic?

If we dive into the numbers a bit deeper, we can get a better appreciation for this mentality.

Assuming a 23 year-old couple started their career and saved 3.1% each year.  Let’s give them the benefit of a doubt and assume this 3.1% is in an investment fund.  Then further assume their salary increased at an average rate of 3% per year and the market returned an average of 6% each year.

By 35 they would have accrued approximately half their annual salary.

Put another way, a couple earning a combined $100,000 a year would have $50,000 in savings compared to the target of $200,000, yielding a shortfall of $150,000.

To them, the goal of twice your salary at age 35 doesn’t look like a hill to climb, it looks like this:

Now let’s look at a couple that contributed 3% in an employer matching 401k.  A fairly typical match is 100% of the first 3%, which gives them an effective savings rate of 6%.

At age 35, they would have accrued roughly 1X their annual salary.

Still a ways off from the 2X value espoused.  The couple making $100,000 would be staring at a shortfall of $100,000.  Again, this is deflating.

Despite the large gap, a small change, could have made all the difference.

Let’s say the same couple increased their contributions by 1% each year. It is common for yearly raises to average 3%, while inflation is commonly assumed at 2%.  If they took 1% of their raise and instead contributed it to their savings, they would not have felt the pain of increased savings since they would be saving money they never had  before.

By age 35 they would have accrued 1.8X their salary. Basically, the 2X value promoted… Relatively pain free!

Is it too late for the typical 35-year old couple?

First, let’s rehash how much money we need to retire.  Now, this is really a personal number, but a commonly held notion is that once your annual spending equals 4% or less of your savings, then you should be able to live off of the growth and dividends of your investments.  This is referred to the Safe Withdrawal Rate, and it does not rely on social security income.

Now, back to the typical 35-year old couple.  Is it too late?  If they don’t take action, then yes.  Assuming a 3.1% savings rate, 3% salary growth, and 6% market return…

They would reach the Safe Withdrawal Rate at the ripe old age of 136!!! 

via GIPHY

Unless, there is one helluva medical advance, or some great inheritance they will be working themselves to death.  Literally!

Is it hopeless? No.  Difficult? Yes.

Our 35-year olds would need to make a drastic change immediately and apply their next 3% raise entirely to savings.  Then, moving forward their savings rate would need to increase 2% each year.  Then, they need to hope they will receive their full social security benefit.   If they could pull off the savings rate increases and social security is there to bail them out, then they may be lucky enough to retire by 65.  Maybe a part time job is needed to ease the transition?

If social security is paying out reduced benefits, or god forbid no benefits, then significant additional savings needs to occur. So…

The 401k Matchers

Say you’ve been contributing just enough for the company match. No more no less.  I feel like this demographic covers most of the people that I know.  What are your prospects?

How does retirement at 114 years old catch you?

Hard Pass.  Looks like you need social security or a part time job to bail you out here as well.  However… if you jump your savings rate this year by 3%, then raise it 2% each subsequent year, then retirement in your early 70s looks feasible, without social security.

The 401k Maxxers

What if you drop the hammer and find a way to max your 401k at age 35 and keep the pedal to the metal?

Retire at age 76 with no assistance from Social Security.  In all likelihood, this couple will start to invest outside of their 401k over time as their salaries grow (my analysis caps savings at the 401k max contribution level), which would further reduce their time until retirement.  This sounds crazy again, but if your 401k contributions have been limited due to student loans, consumer debt, or child care costs, some of these may be starting to get paid off around this age, freeing up money to divert into the 401k and resulting in rapidly growing savings rates.

Faced with these prospects, perhaps its time to take savings more seriously?

Rather than ridicule the message, take a moment to reflect on what is really at stake.  Do you want to work until you’re dead? It’s true the best time to start saving and investing was yesterday.  But the second best time is today.

But don’t stop the #by35 tweets.  That stuff is gold.

How can you raise your savings rate?

“Get a Side Hustle” seems to be the most popular approach currently.  It’s a valid approach for sure, but here are some other ideas… some are much easier than others.

• Divert debt service payments to investment contributions upon payoff
• Eat out less, by taking your lunch to work or making home-cooked meals
• Shop at lower cost grocery stores
• Do your own yard work
• Replace or repair weatherstripping to lower energy costs
• If you drive a truck, replace it with a car
• Reduce investment fees
• Move to an area with a lower cost of living
• Practice the powerful traits of taking ownership and being courteous to improve your job performance to set yourself up for better raises or other better career opportunities.

All the above are good options, but the best place to start is by tracking your current spending and establishing a budget process.

I don’t want to come off too preachy.  We have quite a ways to go ourselves, as we are not quite 35 (close enough!) and have a bit less than 1.5X our salary saved.  And this is more the result of my parents starting me off investing at an early age, and both of us holding good jobs, than it is due to a high savings rate.  But since the light came on for us in the past year or so, we are crawling and scratching our way to better our financial position and get ourselves into the 401k Maxxer category.

Thanks for reading!