A Fidelity chart suggesting that people should have hold twice their annual salaries in retirement savings by age 35 set Twitter alight this month. Many younger people were incredulous: is such a thing even feasible? It is: savers must put aside 15% of their pre-tax salary every year and with some friendly market conditions, no miracles need occur.
When calculating required contribution rates for future investment sums, the key item is the rate of return. Over long periods of time, even modest differences in return assumptions will create large disagreements. However, the effect is modest for this exercise, because the time horizon is only 10 years.
What I don't accept is the notion that people "should" plan for such an amount. That is a Twitter invention. I would label Fidelity’s savings targets as stretch goals – achievable for some employees but unrealistic for many others.
The objective of owning twice one's salary at age 35 is one of several rungs on Fidelity's age-based ladder, which concludes at age 67, with the employee possessing 10 times her salary in retirement assets.
But "nice to have" is a very different thing than "should have." It is nice to own a house outright with no mortgage. It is nice to have a university degree. It is nice to have 10 times one's salary at retirement. Nonetheless, millions of people enjoy full, successful lives without achieving any of those items.
What's the Right Amount?
This is not to criticise the savers. Investing 15% of one's salary throughout one's career, ensuring a prosperous retirement, is a perfectly valid choice. Investing 100% would surely be too much, and investing 0% is likely too little, but 15% lies within the plausible range. So, too, do 8% and 11% and 18%. Some people burn the candle more brightly when they are young, while others prefer to postpone the flame. Who are we to say which is correct?
Obviously, those guidelines overstate the need for anybody who will receive a final-salary or defined benefit pension. There aren't many such plans left, and those that do exist are largely being phased out.
They also aren't realistic goals for occupations that require heavy early investment in human capital, or which have steep salary curves. Doctors and lawyers fall into that category – students of both professions are saddled with large debt early in their careers but their lifetime earnings potential should be higher than the average worker.
Also landing in that category are those who are paid in equity. The small businessperson who takes out a loan to start a firm, and who spends her first few years in building a client base, probably won't have much of a retirement portfolio at age 35. However, she may have a very substantial one at age 65.
So you could argue the Twitter exchange was useful in that it generated a discussion about savings and it shocked younger workers into thinking about retirement issues.
John Rekenthaler has been researching the fund industry since 1988. He is a columnist for Morningstar.com. While Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.
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