Twice Your Income by 35

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Twice Your Income By 35

I’m not a big fan of the one size fits all style of goal setting, but I couldn’t get away from all the media attention to an article by Market Watch that blew up on social media this week.  The author suggests a target:  Save twice your income by Age 35.  Mayhem ensued.

Assumptions

The Bureau of Labor and Statistics reports an average salary for Ages 20-24 of $27,456 per year.  The average salary for Ages 25-34 is $39,416 per year.  So let’s use the following assumptions:

  1. Start saving at Age 20, taking home $24k per year, or $2000 per month.
  2. At Age 25, you get a raise to $36k per year or $3000 per month and maintain that salary.
  3. You save the same percentage each month towards your retirement goal.
  4. Based on the Market Watch article, your goal is to have twice your income ($72,000) in retirement savings by Age 35.

Questions

A)  What savings rate would you need to maintain to reach twice your income by Age 35?

B)  Is the outrage over this article well placed?

Analysis

Before I started anything, just on intuition, this seems like a hard goal and I’m sympathetic to the roasters on twitter.  So I set up a model with the above assumptions and the target 15% savings rate that is often quoted by financial advisors.  I put an 80/20 stock/bond allocation, but the specific allocation didn’t matter too much over this relatively short time frame.

Age35Figure1
Figure 1: 15% Savings Rate from Age 20 to Age 35

The above results were a surprise to me!  I thought perhaps there would be a 50-50 chance of reaching the Age 35 savings goal, but instead you’re almost certain to achieve it.

So what’s the 50-50 break even savings rate?  With a little tinkering in the model, I found a savings rate of 10.4% gives you a retirement savings twice your income by Age 35:

Age35Figure2
Figure 2: A savings rate of 10.4% gives you a 50% chance of reaching the goal

Conclusions

I’m not saying it’s easy, but at least it is clear and straightforward:  If you want to have twice your income saved by Age 35, you need to be saving 10-15% of every paycheck.  The later you start, the more aggressively you’ll need to save. How much sacrifice that savings rate demands depends on your individual circumstances and probably isn’t attainable for those servicing large student loan debts (or a variety of life’s many surprises). But I think paying yourself first with 10% of your paycheck towards retirement is a reasonable goal for which to strive.

Answers

A) Somewhere in the range of 10-15%.
B) You’re not gonna believe this, but I have to conclude that maybe, just in this one case, the outrage on twitter is a bit overdone.

 

7 Replies to “Twice Your Income by 35”

  1. This was a fun ride; I always enjoy looking through the numbers.

    I also find it interesting that you came up with 10% for your 50/50 break-even. 10% is the classic amount suggested to save – see the Richest Man in Babylon.

    1. Hi JoeHx,
      Yeah I was pretty surprised to find that 10-15% rings true. I assumed the analysis would find something like 30% savings rate to reach what feels like a big number by Age 35. My big takeaway is that if you wait and wait and wait to get started, the math becomes untenable pretty quickly.

      I’ll check out your book recommendation, thanks!
      Mouse

    1. Well, you can always try for $0 income and achieve the goal. That said, I tried to highlight the goal is achievable for most, but more difficult for some.

  2. Wait people overreacted to something on the internet without considering the facts?
    Did the original article give any consideration to student loans?
    Is the advice twice your income in net worth or just investments?
    Since you’re using averages, you ought to layer in the average student loan and see what savings rate is required to overcome that and still get to 2x income.
    Just a thought .

    1. The original article does make reference to today’s 30 year olds being “plagued with cripping student debt, which just hit a record $1.31 trillion.” However, they think that focusing on student debt, bigger homes, and expensive weddings shouldn’t be prioritized ahead of retirement savings.

      The advice is twice your income in retirement savings. It’s really up to you to know if that investment account is earmarked for retirement or not; but the idea is to have twice your income saved up that is dedicated to your retirement years and doesn’t have any other job (emergency fund, house downpayment, kids’ college).

      Personally, I think student loans are the big roadblock. It’s nice to try to set aside 10% for retirement first and then start tackling all the living expenses and other debts; but for many this is a huge ask.

      Thanks for the comment!

  3. That is actually a lot easier than I thought! And was a nice surprise, since I usually invest triple that, look forward to seeing how much I have by 35 (only 4 years away😅)

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