Many articles have been written about the savings you need to have at different ages. In 2009, I wrote my own article Retirement Savings Ratio, which included a spreadsheet to track your own situation. Fidelity recently offered a chart which the New York Times picked up and ran as a story. What’s amazing to me is the numbers are not correct. To be clear, I’m accepting the assumptions Fidelity offers. 5.5% is a pretty conservative growth number, as is a 1.5% annual raise.
Now, when you take the spreadsheet and do a bit of editing, the numbers speak for themselves.
- Zero out savings from 20 through 24.
- Change Annual Raise to 1.015 (this is 1.5%)
- Change percent saved to .15, then manually change the percent to 9 for age 25 and increase 1% each year till age 30
- The above builds in the 3% employer deposit, so all set there.
- Annual return is 1.055 (this is 5.5%)
Sorry if this is a bit tedious, but it’s how you can see the numbers for yourself. The result is that the chart underestimates savings by nearly 50% by retirement at 67. From the spreadsheet I wrote:
I was tipped off that something was wrong when I saw linear growth, 1x through 6x every five years. That alone told me these numbers weren’t calculated correctly. Growth over time is exponential, not linear. Don’t believe me, pull a copy of the spreadsheet and run the numbers yourself. Most important, don’t believe everything you read. Unfortunately, I can’t get a copy of the underlying spreadsheet Fidelity used to produce their chart, but you can grab a copy of mine.
Keep in mind, rules of thumb are just that, guidelines that apply to people in the center of a range. Some people retire and find that with 40-50 hours more time each week, are spending far more than they did prior to retiring. Others were saving 20% for retirement, 20% went to the mortgage, and 20% or more to college tuition payments. These folk were living on less than half their income. This article was not about calculating your number but about my observation how one pro got it wrong. A future article will discuss your number in greater depth.