It’s as if the financial press WANTS people to be poorly prepared for a happy retirement. This chart from CNBC – dubiously thought of as a business channel – suggests the amount of savings people should have at different ages before retirement. A friend sent it to me a while ago and I think it’s simply terrible.
First, the chart starts with the frequent financial planning mistake of assuming what you MAKE today is a proxy for what you will SPEND in retirement. I know people who spend LESS in retirement than they once earned, and I know folks that spend much MORE. Decide what you want to spend when you stop working and then save to that number – regardless of what your paycheck used to be.
Still, the bigger issue with the chart is that the savings multiple targets seem woefully low. Assuming you earned $75K a year/planned on spending $75K, the suggested 10x multiplier at age 67 would only build a nest egg ($750K) that provides an annual ‘safe withdrawal’ of $30K, using the basic Trinity Study 4% recommendation.
Yes, the Trinity Study is just a rule of thumb or starting point, but $30K isn’t even close to $75K. And that’s at age 67. At age 60, which is much closer to the average age of retirement for most people (62), the suggested 8x multiplier would leave you with only about $24K in annual spending.
I would suggest anyone seriously looking at retiring should TRIPLE the savings they see on this chart. I’m not kidding. Especially if you are thinking of retiring 3-5-10 years early. That level of savings might be very difficult at age 30 or 35, as you are still early in your career, but by age 40, you’d better have your savings in HIGH gear.
As a personal point of comparison, our retirement nest egg at age 50 (just after I retired) was 30x our planned early retirement spending. I probably wouldn’t have even considered leaving work if I had much less of a multiple than that. A 35-40 year retirement horizon is just too long to not have saved adequately.
Chart Credit: CNBC