I’m almost 40 and according to the wisdom found everywhere on the internet, I don’t have enough saved for retirement. Which worries me because I’ve been saving for as long as I’ve had a proper job with access to a retirement vehicle. But also because the internet wisdom doesn’t make sense or sound feasible.
According to what I’ve read, you’re supposed to have:
- 1x your income when you’re 30
- 3x your income when you’re 40
- 6x at 50
- 8x at 60
- 10x when you retire
I’m almost 40 and I have just barely over 1x saved. So it feels like I’m 10 years behind. However, my income has grown substantially over the course of my 30s, more than doubling. So accounting for growth in income, I do have almost 3x my salary in my late 20s. But similarly, the above advice could be interpreted as needing 6x the income you had when you were 30 by they time you’re 40. And by that metric, I’m doing even worse!
I think that talking about the “salary” you want in retirement is misleading. When you’re working, you have a top-line salary that’s really easy to access and pin your concepts of lifestyle to, but actually has very little to do with your lifestyle. Example: if you’ve got $100k salary, you’re probably paying something like $30k between federal, state, and SS taxes. If you’re maxing your retirement contributions, there goes another $20k, and you’re only taking home $50k.
If you’re saving 50% of a $100k top-line, including that 401k contribution, then you’re probably living on something more like $30k after taxes, and it’s a lot easier to save enough to pay yourself $30k than $100k. If you’re living on $30k/year withdrawals from savings, you’re not going to pay taxes. You’re not going to need to save $50k/year. You only need to replace that $30k, and 25*$30k is just $750k.
The 25x rule includes $0 social security. Reasonable for FIRE people, who may aim not to work enough to qualify for SS, but if you will, then you can calculate the savings equivalent to your estimated income. eg, if they say you’ll probably qualify for $1500/month = $18k/year, that’s equivalent to 18k*25 = $450k savings.
Edit: I used the 2nd calculator on this page to adjust for future inflation.
Thanks for the breakdown. I definitely look at retirement in a pessimistic light. Honestly I’d love feedback so let me know what you think. Here’s the assumptions I make:
I work 30 years and retire around 50, die around 85. Let’s also say I’m just starting to work and have those 30 yrs ahead of me to make the math easier. So 30 yrs work, 35 years retirement.
Inflation based off 2000-present, ~2%. That $30k becomes ~$54k at the beginning of retirement [bor], ~$108k at the end of life [eol].
Health insurance starts around $600/mo in my area so $1k/mo at bor, $1.46k/mo at 65 when Medicare kicks in. $54k -> $66k
I’d like to travel more. Currently my ideal trips cost $7k/person. With inflation becomes $12k bor. $66k -> $78k/yr bor.
I have had an up-close view of end-of-life for 4 close relatives. I’ve been a caregiver before and don’t wish that for my children. My bloodline is shit and if I live to 85 then I can optimistically guarantee at least 2 years of nursing home care and maybe 5 years of an in-home caregiver part time. Currently in my LCOL city nursing homes start at $70k/yr and in-home caregivers are ~$20/hr. Adjusting for inflation each year of nursing home is $243k. $20 for 8 hrs a day is $58.4k with inflation $184k on top of living expenses. I really just expect EOL to soak up any cash I have left.
There are things like I won’t have a mortgage, and savings will be minimal. I don’t take that into account though because I know 1) I will need more help maintaining my current house (I hope to pass the house to my children), 2) seeing how the economy is trending now I may want to help my children financially.
There definitely are ways that spending can increase after retirement to take up money previously used for taxes and savings. The key thing is to focus on the spending side. You have to know how much you’re actually spending, today, before you can sensibly add new expectations. Then you can sensibly plan for how to meet those expenses. You’ve hit on probably the two most popular categories - healthcare and travel.
In the US, healthcare is a huge unknown anti-lottery, but the ACA has been a great boon for early retirees. Early retirees generally have very little declarable income - spending from taxable savings, so only the gains or dividends are taxable - and the ACA tax credit effectively caps your premiums at a sliding percentage of that income. The nominal premium may be $600/month, but you’ll only pay $80 at $30k income (which might allow you $60k spending). Biden changed the formula for Covid to be even more generous, but I believe that’s temporary. Obviously still have to pay care costs, but ACA plans have annual out-of-pocket caps, currently in the $6-12k range, so you (theoretically) won’t face total disaster if you need a $250k liver transplant. You still have the lottery system of whether you have significant costs or not, but having a limit on your losses helps. Definitely learn how the ACA and Health Savings Accounts work if you’re planning to retire early.
EOL care is a big part of that unknown. There is insurance for long-term care that can, if nothing else, convert the unpredictable anti-lottery to a predictable expense. It’s also worth noting that when you need to transition to assisted living, you no longer need your primary residence, so it’s fair to plan to sell the house to pay for the nursing home.
If you plan on passing the house on, then maybe the kids can earn that house by helping with care. My parents planned on passing their house on to the kids, but none of us want it. Us kids needed help when our parents were 50 - college, starting households, etc - but by the time they retired, let alone approach end-of-life, we’re now 40s, 50s, established in careers, and starting to think of our own retirements and legacies. By the time my parents (probably) pass, their kids will mostly be retired and their grandkids well on the way of their own lives. Passing at 85 is very different for the surviving generations than passing at 65.
For me, using the future value of the costs exacerbates my fear. I prefer to work in inflation-adjusted numbers and reduce expected investment returns by inflation. Mathematically, it’s the same - add 2%/year to all your costs or subtract 2%/year from all your savings - and I have a much better intuitive feel for today’s costs & spending. SS income gets an annual inflation-rate increase.