RETIREMENT SAVING RATIO, INVESTING - YES OR NO?
Channel: Value Investing with Sven Carlin, Ph.D.
Date: 24/05/2018

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How much should you have saved by 35?

As Megan Markle just became the new Duchess of Sussex at 36, how much you should have saved before 35 became a viral thing and I have seen articles about it everywhere, from Morningstar to the Wall Street Journal.

The common finance standpoint is that you should have saved at least twice your yearly salary by 35 which is an achievement many compare to marrying a British prince.

The 2X salary by 35 savings rule

The fact that you should have at least 2 times your yearly salary saved by 35 comes from Fidelity and is their savings factor that gives you confirmation that you are on a good track to reach 10 times your salary by 67 and retire comfortably.

Fidelity came up with four factors to help you prepare for your retirement: a yearly savings rate, a savings factor, an income replacement rate and a potentially sustainable withdrawal rate. Today we will focus on the savings factor and leave the other topics for another day. I’ll try to put the savings factor into current financial market’s perspective.

Let’s start with Fidelity’s assumptions which is something you might already see as crazy given the student debt you have if you are younger or the extremely high living costs today. Fidelity expects each of us to save 15% of our salary, invest more than 50% of that in stocks, retire at 67 and plan to keep your previous lifestyle. Those sound like shitty assumptions to me but let’s continue.

A few issues and where you should take responsibility for your financial life and retirement

Given the above assumptions many think that if they do that, invest in index funds, overweight stocks in the first years and adding more bonds later, they will reach 10X salary savings at 67 and retire comfortably. That is actually more than correct but here are some things that are not so nice.

Having the goal to retire at 67 really sucks

Retiring is something you wish to do as soon as possible or never if you love what you do. If you don’t love what you do, then better retire as soon as possible. A very inspiring story comes from 94-year-old John Goodenough, professor in the Cockrell School of Engineering at The University of Texas at Austin and co-inventor of the lithium-ion battery. Yes, you red that correctly, 94 years of age and still a professor leading at team of scientists. 

Figure 3 94 and still hustling

Source: UTexas

So, that is one but if not an option for you let’s look at whether what most expect can easily happen.

Saving 15% of salary, 1.5% wage growth and investing should lead to 10 times salary by 67 starting at 25.

I will use $40k as a starting salary because it is the average wage between 25 and 34 years old in the U.S. The ratio is what matters here not the salary.

So, if you have a salary of $40k, saving 15% of it means putting aside $6 thousand. The fact is that the average personal saving rate is 3%. The top 1% probably save around 30%, the top 1% to 10% save around 15% while the bottom 90% in income save much less.


So, if you are average, try to increase your savings by 5 times!

Return on investment is not even that important

If I invest 15% of my $40k salary every year for 42 years and get a 7% return, the total sum at year 42 is $1.8 million which is 22.5 times the $80k salary at age 67. However, if the return is just 5% per year, compounded, the saved amount falls to $1 million while if the return falls to 4% per year, the amount falls to $829k which is still not bad but a big difference.