Retirement: Do you really need to save twice your salary by 35?

The following column from  Jennifer Pagliara , CapWealth Senior Vice President and Financial Advisor, was posted by  The Tennessean  on June 26, 2018.

My sister-in-law sent me an article a couple of weeks ago from MarketWatch, titled “Money Milestones: This is how your finances should look in your 30s.” In the article, the author said that by the age of 35 you should have twice your current salary saved. So, if you are making $50,000 a year, then you should have $100,000 saved.

The column was recently picked up on social media, with Twitter users hilariously posting what you should actually be saving by your mid-30s. Of course, Buzzfeed quickly published the most hilarious responses. At first, I thought the article’s numbers seemed very arbitrary — why twice your salary by 35? I decided to do my own research to see how I really felt about this suggestion.

I don’t think anyone underestimates the daunting task of planning for retirement and ensuring you have enough saved when the time comes. The No. 1 question that most financial advisers are asked by those heading into retirement is “Do I have enough?” So, I see where the author is coming from. Her point is that it’s important to hit milestones throughout your financial life so you’re not scrambling as you near retirement. But, let’s dig into the numbers to see how much you actually need to save for retirement and if having double your salary saved by the time you’re 35 even makes sense

The first thing to remember is that everyone has different expectations for how they want to live in retirement. You might need $10,000 a month to live comfortably and another person might only need $2,000. The age you want to retire also greatly affects how much you need to save. Therefore, each person’s end goal number is going to be different.

Generally, advisers suggest that in retirement you should not withdraw more than 5 percent of your investments every year. The safe zone is 3 to 5 percent. When you start going over that, you tend to start digging into principal and affecting your ability to outlive your money.

Let’s run through an example. The U.S. Census Bureau shows that the average retirement age in the U.S. is 63. The average life expectancy for a man who is 65 today is 84.3, and it’s 86.6 for a woman. Therefore, let’s be cautious and say you are going to spend 24 years in retirement and need $100,000 annually to live off of. If we use the 3 to 5 percent rule, you simply divide $100,000 by 3 percent to get $3,333,333 to be on the conservative side or by 5 percent to get $2,000,000 to be on the more aggressive side.

So how much do you need by the time you’re 35? If you retire at 63, then you have 28 years left to save. The average salary for ages 35 to 44 in the U.S. is $49,400 per year. You would need $100,000 or double the average salary by the age of 35 to have $2,000,000 saved by 63, assuming a 5 percent return on your investments and saving $25,000 a year.

As arbitrary as the twice-your-salary number seemed at first, it isn’t so random after all. But remember, there are a lot of factors that go into getting you to that end goal number. Your investments might return more than 5 percent, or you might get a pay raise that you weren’t planning on that allows you to save more. Therefore, don’t be deterred if your savings at 35 aren’t quite double your salary. But it will take a plan and dedication to get you where you want to be.

Jennifer Pagliara is a senior vice president and financial adviser with CapWealth Advisors, LLC, and a proud member of the Millennial generation. Her column speaks to her peers and anyone else that wants to get ahead financially.