I’m sure some of you had a chance to read the recent article on Marketwatch suggesting you need to save double your salary by age 35. Being the internet, this article was immediately divided into two warring factions. One side arguing the article is elitist and fanciful in its naïveté and the other side arguing the article is rational and factual in its logic. Here is our rational take on how much you should save by age 35.
Both arguments are correct.
Hang on . . .hear me out!
The Conservative Argument
On the one hand, if you can save at a reasonable rate (around 10 percent of your income per year) and you start saving right out of college or high school (ages 18-23) you should have enough time to rack up a decent savings by age 35. If your company matches your 401k contributions, take full advantage. If you aren’t using an IRA or 401k plan, start now. They’re free.
Being conservative, from ages 23-35 you have 12 years of compound interest and lump sum saving to reach your goal. Let’s say you make $50,000 a year to make the math easy. By age 35, you expect to receive several raises, so your salary at age 35 is $65,000. Under our hypothetical, you need to save $130,000 by that point. If you save ten percent each year and put any windfalls in your savings accounts (bonuses, inheritances, etc.), you should be at or near $130,000 by age 35. Any employer match is just gravy.
The Pushback
Ok. Now to play devil’s advocate. Let’s say you fall on one end of the financial spectrum. Maybe you make $20,000 a year or maybe you make $200,000 a year. The process is the same, but the result may be more difficult. Those who make less will have trouble saving ten percent a year because normal life expenses eat up a large portion of your earnings. Don’t sweat it. Shoot for the stars with your saving and make sure you max out any 401k or HSA plan if you can. Save a minimum of 5% of your income each year regardless. Will you have double your salary saved by age 35? Doubtful. Will you be a person with excellent financial wellness and a good head start on life? Yes.
Same with those high-rollers. Saving double your salary if you’re making $200,000+ is a tall task by age 35. You should be able to put away ten percent and max out any 401k plan. If not, do a financial audit of yourself to see where your spending went awry. Use a retirement calculator and determine how much you’ll have in an investment account at age 35 after saving ten percent per year. If you like the number, congrats. You’re finished. If you don’t like what you see, make a plan to save more.
Conclusion
As with all things, shooting for a specific dollar amount in terms of savings is great for some and torture for others. The basic skills: saving five to ten percent of your income, maxing out 401k or employer match, avoiding credit card debt, avoiding car loans with payments over $400 and terms over 5 years. All of those will serve you well. Don’t hate the argument made in that article. Just don’t feel the need to starve yourself to meet that goal. If you are age 35 and don’t have savings . . .you’re in luck. You can start NOW! Set a goal for yourself at age 47. By the time you reach 47, we may be living longer than ever and you’ll still be young.
Stay rational.
-B&T