Gen Y Retirement Savings Goal: $2 Million?

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

gen Y retirement savings goalWhat 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:

  1. I won’t bank on an inheritance or Social Security to save me
  2. I plan to save as much as I possibly can at all times
  3. I will continue to take full advantage of employer help through 401K matching
  4. I plan to reduce my expenses as much as I can, pre and post retirement
  5. I will not base my decisions/calculations/goals off of useless income multipliers or one-size-fits-all numbers
  6. I will base my calculations off of my annual living expenses, pre and post retirement. Without this data, any analysis is useless.
  7. 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?

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