You probably need 25 to 30 times your current salary saved to retire??????

[nun]

I was watching an NHPTV show on retirement yesterday and the "expert" they were interviewing
rolled out the old chestnut that,

"you probably need 25 to 30 times your current salary saved to retire."

why does this myth persist, surely 15 to 20 times your expenses is a better way to assess what you'll need.

 

[Dawg52]

Lord, 30 times my latest salary(gross) would be unachievable. Many old threads on this topic here.

 

[nun]

Lord, 30 times my latest salary(gross) would be unachievable. Many old threads on this topic here.

Its not really the numbers, but the persistance of the myth that amazes me. Why is salary taken as an indicator of what you need to live on? If you hope to retire you obviously need to save, so salary is no measure of your current or future need for money. I have my own opinions about why salary is used, but would be interested in yours.

 

[teejayevans]

I was watching an NHPTV show on retirement yesterday and the "expert" they were interviewing
rolled out the old chestnut that,

"you probably need 25 to 30 times your current salary saved to retire."

why does this myth persist, surely 15 to 20 times your expenses is a better way to assess what you'll need.

Because most people who haven't saved at all:
1. Need to be scared into saving
2. Haven't saved because they are living beyond their means.

Ditto for the "you need 90% of your salary" myth.

Tom

 

[Andre1969]

This isn't just getting mixed up with the "you need 25 times your annual expenses to retire" (the 4% SWR) rule, is it?

 

[lazygood4nothinbum]

30 x's my pathetic salary? not a problem.

 

[Behan]

Couple thoughts, unfortunately:
- Many people have no idea what their expenses are, but they do know what their salary is.
- Many people's expenses are equal or greater than their salary, so salary is the right number to use, heck maybe it's even conservative!

That said, I think the numbers they are using are crazy, I'd be working forever.

 

[nun]

Because most people who haven't saved at all:
1. Need to be scared into saving
2. Haven't saved because they are living beyond their means.

Ditto for the "you need 90% of your salary" myth.

Tom

Exactly, what gets me is that nobody points out the contradiction in expert advice ie.if you save for retirement you have to be able to live off less than your salary, when the 20x salary would suggest that you will be spending your entire salary, assuming a 5% return and maintaining your capital.

 

[nun]

Couple thoughts, unfortunately:
- Many people have no idea what their expenses are, but they do know what their salary is.
- Many people's expenses are equal or greater than their salary, so salary is the right number to use, heck maybe it's even conservative!

That said, I think the numbers they are using are crazy, I'd be working forever.

Then these folks have no hope of saving for retirement.

 

[OKLibrarian]

Because most people who haven't saved at all:
1. Need to be scared into saving
2. Haven't saved because they are living beyond their means.

Ditto for the "you need 90% of your salary" myth.

You hit the nail on the head. The problem, of course, is that lines like that freak people out to the point that they shrug and say "why bother?", instead of saving what they can. now, while some folks may be looking for those sorts of excuses to avoid LBYM, I'm not looking forward to having to support these folks in years to come. Lack of opportunities/education is one issue, and I'm quite happy to have my taxes/donations go to fixing those social ills--I see it as my responsibility as someone who won the birth lottery. However, lack of self-control is quite another matter.

 

[JustCurious]

I was watching an NHPTV show on retirement yesterday and the "expert" they were interviewing
rolled out the old chestnut that,

"you probably need 25 to 30 times your current salary saved to retire."

why does this myth persist, surely 15 to 20 times your expenses is a better way to assess what you'll need.

As others have said, for most people this is not a myth, since most people live at or above their means, and for the majority of people, they really do need 25 times their salary to live comfortably in retirement at the same level pre retirement.

Of course, for those of us who LBYM, this rule is inapplicable. It's not how much you make that counts, it's how much you spend. Most people just don't get that though.

 

[jIMOh]

Its not really the numbers, but the persistance of the myth that amazes me. Why is salary taken as an indicator of what you need to live on? If you hope to retire you obviously need to save, so salary is no measure of your current or future need for money. I have my own opinions about why salary is used, but would be interested in yours.

I disagree to an extent. I do agree a person needs to save "based on expenses" and not "based on salary". BUT, and huge BUT.

salary drives spending... spending does NOT drive salary in any way shape or form. And current salary is also a reasonably successful predictor of future salary.

So if a person is 20-30 years away from retirement, they don't know what they'll be spending in 20-30 years, but they have a good idea of what they'll make, which will be an indication of what they'll spend.

For me, I am shooting to save about 25-33x my current salary (and I'm 20 years from ER and 30 years from normal retirement). I know when I get close to examine what I have saved relative to what I spend (at that time).

Because of inflation, if I figure out what I spend now, and try to save that NOW, I would fall short because surely in 20 years the stuff would cost more.

 

[nun]

salary drives spending... spending does NOT drive salary in any way shape or form.

I'm not sure this is exactly true as it implies that people's spending is controlled by their salary and the level of debt in the US would argue against this. I think that spending is driven by advertising and the prevailing capitalistic culture that encourages consumption and gives everyone the tools to live beyond their means,ie credit cards and sub-prime mortgages.

Retirement experts should not give advise about how much you need to retire, rather given your age they should tell you what percentage of your current expenses you need to save

 

[runchman]

I think that spending is driven by advertising and the prevailing capitalistic culture that encourages consumption and gives everyone the tools to live beyond their means,ie credit cards and sub-prime mortgages.

So given this then, the 25x salary number is actually TOO conservative !!

i.e. if I'm not surviving right now on my salary, how will I make it on xx% of my salary in retirement?

- John

 

[rmark]

I suspect most people think in terms of salary = after tax income. And 25x that, adjusted for discounted pension income and Social Security, would probably be about right for a 25 year life expectancy.

 

[W2R]

salary drives spending... spending does NOT drive salary in any way shape or form. And current salary is also a reasonably successful predictor of future salary.

Wow - - thank goodness I have more self control than to allow salary to drive spending. I suspect that salary does not drive spending for most people here.

 

[nun]

So given this then, the 25x salary number is actually TOO conservative !!

i.e. if I'm not surviving right now on my salary, how will I make it on xx% of my salary in retirement?

- John

Yes! its way too conservative for people who actually plan to ER and live comfortably in retirement because the "secret" is to LBYM and save and once the house is paid for your living expenses fall dramatically.

 

[nun]

Wow - - thank goodness I have more self control than to allow salary to drive spending. I suspect that salary does not drive spending for most people here.

I think you are right. What I think many families find is that they have large fixed outgoings like mortgage, medical, college fees, car payments, and credit card debt or loan repayments. These leave them little to save for retirement and unfortunately now that most employees have lost the non-contributory defined benefit pension plan they have to pay for this out of their salary.

What frightens me is that we are always being encouraged to spend on material goods and financial experts are also trying to get us to save unrealistically large amounts for retirement.....stop the madness, if we live more frugally we'll have money left over to save and we'll need a smaller amount in retirement because
our exspense are less.

PS who thinks that the loss of pensions and the introduction of 401ks was basically a 10 to 20% pay cut for most of us....?

 

[clifp]

I think if they simply changed the rule of thumb to be 25x your take home pay, everything would be ok. Now for those people who save a significant amount of money outside of their 401K plans it would be too pessimistic, but since most people have little saving outside of retirement it would a reasonable

 

[runchman]

I really wonder what IS going to happen to the masses. We prepared ER message-boarders are probably in the vast minority, and we still worry -

We debate the nuances of 3 vs 4% swrs, paying off mortgages or not, etc, while most blissfully go along their merry way figuring "It'll work out for me somehow" while they save diddly squat.

Even in my line of work, engineering, where people are pretty math-centric, interest in investing is pretty low.

Maybe if financial security isn't on the minds of these folks now, well then maybe they won't be bothered by not having it when retirement age comes around either?

I just hope we don't end up paying for them in some way

- John

 

[runchman]

I think for the masses the message has to be communicated in short-term figures, rather than telling them they need a huge sum to retire.

How about "Save 10% of every dollar of salary you ever get, and you'll most likely be able to retire at 65".

Thinking long term and contemplating mutliple-hundred-thousand dollar balances are just too far out for many to imagine.

 

[teejayevans]

How about "Save 10% of every dollar of salary you ever get, and you'll most likely be able to retire at 65".

I can understand why someone who plans on retiring at 65 and is in their 30s or 40s not
saving because its SOOOO far away, I'll bet most who haven't saved plan on doing it as
soon as the kids are out of college. Its human nature, just like playing lottery, because many
people are bad at math
tj

 

[SteveR]

...I disagree to an extent. I do agree a person needs to save "based on expenses" and not "based on salary". BUT, and huge BUT.

salary drives spending... spending does NOT drive salary in any way shape or form. And current salary is also a reasonably successful predictor of future salary....

For the non-FIRE folks I know, most of them spend more than they make. As their salary goes up, so does their spending but not their savings. Salary drives spending only because it allows a person to spend up a limit which is their income (plus credit cards, car loans, personal loans, RV loans, boat loans, ATV loans, etc.). Spending is only casually related to income in these folks. They are limited by the size and number of loans they are allowed based on their income. At some point they have to slow down their spending as their debt load hits critical mass. Bankruptcy is the usual result....then they start all over again. "Rinse and repeat..."

These folks will HAVE to work until they hit retirement age. Company 401K plans require you invest in them and is not (always) automatic. The quickly becoming defunct pension plans (usually) did not require you do anything except sign somewhere (some companies did and still do require employee contributions.) So unless and individual actually went to the trouble to have money taken out of their paycheck it did not happen so there was no savings and no seed money available to create the nest egg. The only way these folks are going to get by is working until they have to retire or can't work any longer.

The big question is what then......SS is not going to cover all their expenses unless they radically change their spending habits and pay off their debt. I can't imagine going through life (again) with maxed out credit cards and second mortgages and telling the kids there is no money for college and that they will have to take care of mom and dad when they retire because there is not enough money for them to eat.

FIRE folks look at salary (income) and expenses in a different way. Salary (income) is the tool to drive initial savings through cafeful spending. Savings become the means to invest in the wide variety of instruments available that use money to create money. The old saying "it takes money to make money" is very true. At some point during the savings and investing cycle, the amount of salary no longer has much of an effect on the amount of the next egg since the growth of their investments in many cases, exceeds their salary. That is when you are FI and when you can look at ER.

 

[rmark]

"I think for the masses the message has to be communicated in short-term figures, rather than telling them they need a huge sum to retire.

How about "Save 10% of every dollar of salary you ever get, and you'll most likely be able to retire at 65".

Thinking long term and contemplating mutliple-hundred-thousand dollar balances are just too far out for many to imagine."

I agree. I think most people are overwhelmed with the dollars needed to support themselves with a comfortable standard of living, and tend to tune out the fact the starting with small amounts early is likely to lead to large amounts later on.

 

[Alan]

Did the "expert" mention anything about age? 20 years ago I did need 25 times my salary. Since then my income has trebled and our kids are through college.

If experts are going to talk salary rather than expenses then they should throw in other variables.