According to 77% of 226 investment advisors, in a recent survey, the low bar for what Gen Y (millennials) should save for retirement is $2 million.
One author and investment firm president was quoted as prescribing just that,
“For a generation Y person who thinks she wants to retire at around age 70 who is going to have slightly above-average annual expenses, $2 million is probably the right number.”
To get to a $2 million goal,
“A 25-year-old will need to save about $7,405 annually, or $142 per week, to get there over 40 years, assuming an 8 percent annual return.”
Aon Hewitt, an HR consulting firm, gave a more formulaic recommendation for Gen Y’ers of
“18.7 times their final pay for retirement.”
Lets pause for a moment here.
While I think it’s great for EVERYONE to calculate how much they will need for retirement, articles like these won’t do you any favors. In fact, they can be very dangerous. Here’s why:
1. Prescriptive one-size-fits-all numbers for retirement savings do not work
What is “slightly above-average annual expenses”? Well, the article doesn’t say, but don’t you think that might provide some valuable context? And what if you are at half the average annual expenses (if you knew what the average is)? Would you only need $1 million then?
What if you want to retire in San Francisco? Chicago? Omaha? Monetary needs are highly dependent on where you will live.
Also – how do these numbers change if you are married versus single? Should we assume a married couple would need $4 million even though their expenses would not be 2X that of two single people?
Bottom line – as nice as it would be, one-size-fits-all numbers simply do not work for your highly customized retirement.
2. What about inflation?
There is no mention of what kind of an impact inflation might have in the numbers in the article, but that is one of the main variables in any retirement analysis.
3. You are not a robot
The “A 25-year-old will need to save about $7,405 annually, or $142 per week, to get there over 40 years, assuming an 8 percent annual return” statement drives me NUTS!! Sure, if you want to have any hope of getting to $2 million, then yes, you should be saving at least that much. Anything less won’t get you there. However, numbers like that should be seen only as a low bar, not a goal to get to. Why?
You’re not a robot! Life happens and lack of discipline is a defining human character trait. You’re probably going to run in to a few employment road bumps along the way. You’re also not likely to have 100% of your savings invested in equities over your entire working career (even though you probably should). And do you really want to work until age 65? REALLY???
How much should you save? Every damn cent that you possibly can without reducing sustainable happiness.
You’ll have good years and bad years, but this rule guarantees that you are saving as much as you possibly can. And why would you want to save any less than that, until your goals are met?
4. Retirement numbers should not be based off of your earnings
One of my biggest gripes with articles like this is when they bust out the obligatory “X amount of final earnings” number (18.7 in this article). Please, please, please tell me what earnings has to do with anything in regards to how much you will spend in retirement – I beg of you.
Even if it were relevant, how does this number help anyone in Gen Y? Who can accurately predict what they will be earning 35 years from now? And how are you supposed to figure out how much you should be saving for the next 35 years if you don’t know what that number is? Completely useless.
While I won’t do you the disservice of prescribing an exact formula or number to aim for, here is how I am thinking about my own retirement:
- I won’t bank on an inheritance or Social Security to save me
- I plan to save as much as I possibly can at all times
- I will continue to take full advantage of employer help through 401K matching
- I plan to reduce my expenses as much as I can, pre and post retirement
- I will not base my decisions/calculations/goals off of useless income multipliers or one-size-fits-all numbers
- I will base my calculations off of my annual living expenses, pre and post retirement. Without this data, any analysis is useless.
- I will use multiple retirement calculators to run the math on how much and when I can comfortably retire
Sure, it’s a little more work and analysis than a one-size-fits-all, but doesn’t something as vital as your retirement deserve it?
This assumes the US financial system at its present state is sustainable. However the numbers according to my research show that to be a mathematical impossibility, using the government’s own budgetary charts and research as premises for my argument and conclusion.
It is a sad day that the future generations of Americans are having their disposable incomes and their purchasing power stolen away in exchange for cool points and subsidizing the already entrenched but broken over-priced and narrow minded American medical system.
Unfortunately the American war state sees no real end in sight either, with troop reductions and withdrawals lasting only as long as it takes before a petro state becomes vulnerable or we talk about cutting down on jobs or military bases.
This is the truth the American media doesn’t report: the ugly, boring, plain factual truth. It isn’t sensational or distracting. Therefore it won’t make the news. And just as the US’s pristine and untouchable credit rating was reduced in 2012, it will happen again, and the gatekeepers will explain it away as just a phenomenon based on temporal activities in the markets, as opposed to the underlying fundamentals of monetary and economic realities of the emerging 21st century global balance.
Maybe we can pass a law that practically wishes our debt away a la Argentina?
I have a ways to go to get to the $2 million mark. I think it’s also hard because the government limits how much you put in your retirement accounts. They want to be a productive employee as long as possible. “Working for the man”
To me this seems a bit conspiracy theorist… Ultimately, the government is giving you a tax break on a huge amount of retirement savings each year. If you choose to maximize that savings all of your working years, you will most likely be able to retire quite early (or have extremely high expenses). I think that the government giving additional tax breaks for retirement savings would benefit a small number of people. I’m a lot more conservative leaning, so I’m not trying to turn this into a political debate, but is your view really that any amount you want to save for retirement should be able to be saved in a tax-advantaged account? For a large majority of Americans, you can already access 23k/yr (5.5k IRA + 17.5k 401k). That is a lot, especially over a decent career and with some level of growth.
I used to read articles like the one you mention and think “oh man, I will never be able to retire.” But now I know I could retire with much less than that because I’m turning into a frugal nut and don’t need that much money to get by. $2 Million would be nice, but I could retire comfortably with half of that.
$2 million is not enough. I firmly believe that that number includes some payment from Social Security. I view SS as a bonus and don’t plan for it at all.
It seems like you are missing the point and striving for the number to be bigger. The entire point is that the number is dependent upon a bunch of factors that can’t easily be generalized. The “come up with a number” game is entirely dependent upon everyone having one matching number. You argue that the number should be higher. What if I am single, don’t plan on having kids, and can sustain myself off of 20-30k. Is my number still 2M? Do you still think it should be higher? Knowing that a 4% withdrawal rate would put that number at 500k-750k…
I have no idea how someone could say 2MM is not enough, unless they’re falling into the consumerist “buy things I don’t need to impress people I don’t like” American trap. Assuming no unnecessary debt, a modest mortgage, and a median to low COL area, I could easily see a family of 3-4 retiring on <1MM in savings (my plan by age 40-45).
A tax free 30k in withdrawals, not counting any side projects that are taken on, could go a long way, at least in my mind. To each their own though.
I recently have a conversation with my wife about this. She thought we would need 80k/yr+ to sustain us in retirement even though we are currently living off ~30k now. By the time we retire, I would expect that we can live off the same amount we are now. To live off 80k/year we would need the $2M figure but to live off 30k, we would only need $750k using the 4% withdrawal rate. I don’t know about everyone else but when I retire, I don’t plan on having house payments, debt payments, or any other major payments.
You’re on the right track, Danny. And always good to be on the same page with your better half.
I couldn’t agree more. A lot of people think the one size fits all investment approach works but it doesn’t. Everyone has different goals, ideas, and personal situations. Finance is an industry that changes significantly based on the goals of the individual.
This can also be a scary figure to see in black and white, another reason why I avoid reading articles like the one you presented. I like how your broke it down and disproved some of their “facts”. Articles like the one you talked about have to make a lot of assumptions to come up with the numbers they presented and we have no idea exactly what their assumptions are or if they are true. Great job presenting your argument and your plan of action.
Awesome article! I wish more people realized that these numbers aren’t a one size fits all deal. I feel like many people my age (mid 20s) read that kind of thing and think “I’m never going to get there”. Then they spew some “live for the moment” quote and stop trying to save because they think it’s all or nothing. Makes me so frustrated to see. I wish more people were out there writing articles like this one! Great job!