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Here’s a simple way to learn your number: Take your current salary and multiply it by 11. That’s the method used by the insurance giant Aon Hewitt to calculate “sufficient” assets for retirement, including Social Security. For a worker who earns, say, $50,000 a year, that means he or she will need $550,000 to replace working income in retirement.
Does that make sense to anyone? Is it something the average joe can do?
I don't understand the value of multiplying one's salary by 11. Huh? If you're doing a quick and dirty estimate, doesn't it make more sense to multiply your estimated annual expenses in retirement by the number of years you think you'll have in retirement: i.e., a 65-year-old person thinks they'll spend $50,000 annually and will live another 25 years?
At least with this method, I understand the assumptions: one will spend a fixed amount over a fixed number of years. That number may not turn out to be accurate -- after all, no one knows how long they'll live, and expenses in retirement will likely not be constant over each year of the estimated lifespan -- but it makes more sense to me than the method in the Forbes example.
Of course, the number in the Forbes example is much more palatable than using the "estimated expenses x estimated lifespan" methodology: $550,000 vs. $1,250,000.
I don't understand the value of multiplying one's salary by 11. Huh? If you're doing a quick and dirty estimate, doesn't it make more sense to multiply your estimated annual expenses in retirement by the number of years you think you'll have in retirement: i.e., a 65-year-old person thinks they'll spend $50,000 annually and will live another 25 years?
At least with this method, I understand the assumptions: one will spend a fixed amount over a fixed number of years. That number may not turn out to be accurate -- after all, no one knows how long they'll live, and expenses in retirement will likely not be constant over each year of the estimated lifespan -- but it makes more sense to me than the method in the Forbes example.
Of course, the number in the Forbes example is much more palatable than using the "estimated expenses x estimated lifespan" methodology: $550,000 vs. $1,250,000.
I agree those 550k looks much easier to get to then 1250k.
In this day and age, $50,000 is not going to afford anyone a fancy life-style, and many people earn much less. I think the median family income in the US is < $70,000 and that's almost always with 1+ jobs in the family. Children are costly, too, and families with children are also expected to save for college, too. In many areas of the country,a $50,000 annual salary won't allow you to qualify for a mortgage because of high housing prices, but even in areas where it would be possible, saving for a down payment would limit saving for retirement.
The "average joe" making $50,000 would have to start saving and investing regularly in his/her twenties; he/she wouldn't be able to afford children; he/she wouldn't be able to live in a decent home or apartment; and he/she surely couldn't afford to have any financial setbacks.
It's a lot easier for people making six figures to save up for retirement simply because they can cover their basic living expenses with a smaller part of their salaries so that they have more to save and invest. It's much easier to buy a Honda rather than a Lexus than it is to rent in a crime-ridden neighborhood rather than in a decent one to save money for retirement.
Kind of like use BMI to determine if someone is at a healthy weight. It's a lot more complicated than that and there are so many individual factors involved.
My approach: Stay as healthy as I can, save as much as I can, spend as little as I can, and work as long as I can.
In this day and age, $50,000 is not going to afford anyone a fancy life-style, and many people earn much less. I think the median family income in the US is < $70,000 and that's almost always with 1+ jobs in the family. Children are costly, too, and families with children are also expected to save for college, too. In many areas of the country,a $50,000 annual salary won't allow you to qualify for a mortgage because of high housing prices, but even in areas where it would be possible, saving for a down payment would limit saving for retirement.
The "average joe" making $50,000 would have to start saving and investing regularly in his/her twenties; he/she wouldn't be able to afford children; he/she wouldn't be able to live in a decent home or apartment; and he/she surely couldn't afford to have any financial setbacks.
It's a lot easier for people making six figures to save up for retirement simply because they can cover their basic living expenses with a smaller part of their salaries so that they have more to save and invest. It's much easier to buy a Honda rather than a Lexus than it is to rent in a crime-ridden neighborhood rather than in a decent one to save money for retirement.
I agree with much of what you are saying but let's look at the numbers a little. Someone making 50k now should be earning twice that in 25 to 30 years. That is point one from the perspective of a 20 something.
Point two currently people are living on much less than 50k now and doing okay as well in many parts of the country. 35k in Little Rock AK for example is a very different life than 35k in Queens NY. Apples to oranges are those comparisons. So basically the number itself is meaningless unless we have some reference point. Many of the experts I have read so far talk that a good percentage of your current income to retire on is 70%. This will give you a fairly close ballpark figure of what you will need to enjoy the current living standard.
I can see the method to the artical and it is just a quick and dirty estimate. It is also figuring adding SS to that amount and a decent return on your invested funds. They are also using current salary that is reduced by taxes and other deductions.
Multiplying expenses time years of life expectancy is not really accurate unless you are going to put all your money under the mattress. And collect no Social Security.
There is no one size, fit all but this is not that far off for a generalization. So if you make 50,000 (Net $40,000) and have $550,000 in your nest egg and it will compound over 25 years, it sounds pretty reasonable.
I can see the method to the artical and it is just a quick and dirty estimate. It is also figuring adding SS to that amount and a decent return on your invested funds. They are also using current salary that is reduced by taxes and other deductions.
Multiplying expenses time years of life expectancy is not really accurate unless you are going to put all your money under the mattress. And collect no Social Security.
There is no one size, fit all but this is not that far off for a generalization. So if you make 50,000 (Net $40,000) and have $550,000 in your nest egg and it will compound over 25 years, it sounds pretty reasonable.
Depends on how invested and market performance in the inital out years. If you experience down markets from the beginning the initial pool will shrink and the growth of compounding over the years limited. If the down years are at the back end and you retire at the start of a raging bull market you get a different result. Imaging retiring with all of your money in bonds back in April and where your nest egg would be today. Compounding comes with a risk factor without decent bank interest rates as we have today.
I think the three points made in the article are correct. It's a good start if you haven't done so already. The article is hazy on the amount needed though. 11 times your salary goes against the 25 times your salary which has been used as a general rule in the past. Some of the difference might be SS, which most people don't count on when using the 25 times. While a lower number may get more people to save because it's seems obtainable, it will do a dis-service to those who get there quickly, thinking they've made it.
I agree with much of what you are saying but let's look at the numbers a little. Someone making 50k now should be earning twice that in 25 to 30 years. That is point one from the perspective of a 20 something.
Point two currently people are living on much less than 50k now and doing okay as well in many parts of the country. 35k in Little Rock AK for example is a very different life than 35k in Queens NY. Apples to oranges are those comparisons. So basically the number itself is meaningless unless we have some reference point. Many of the experts I have read so far talk that a good percentage of your current income to retire on is 70%. This will give you a fairly close ballpark figure of what you will need to enjoy the current living standard.
One would hope that one would be making twice as much in 25 or 30 years, but wages have remained stagnant for the last twenty years and don't seem likely to improve despite advances in productivity. (Historical Median Income: By sex)
Median income for males, in 2011 dollars, in 2011 was $ 50,316. For females, $ 38,685.
Median income for males, in 2011 dollars, in 1991 was $ 48,846. For females, $ 34,214.
Median income for males, in 1991 dollars, in 1991 was $ 30,832. For females, $ 21,241.
Certainly anecdotal evidence suggests that many wage earners are NOT making anywhere near twice what they made in 1991, even in 1991 dollars, or even as much as they made in 2003 in some cases.
Furthermore, depending upon where you live, $ 50,000 isn't even enough for many families to live "modestly", much less save for emergencies, a down payment on a home, children's college, and/or retirement : Family Budget Calculator:
What a family of four needs to live a "modest" life-style in these places. This does NOT include any savings BTW.
Keep in mind, too, that if you need $550,000 when making $50,000 a year, you will need $1,100,000 when you're making twice that in 25 or 30 years.
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