You'll Need 11 Times Your Salary for Retirement

Here's a piece from the Bucks Blog that says we need eleven times our final working salaries to retire with the same standard of living. This is in addition to what we may (or may not) get from Social Security. In other words, it's what we need to save on our own if we want to retire at 65.

A few other details:

• The estimate takes into account inflation and post-retirement medical costs.


• Delaying retirement to age 67 reduces the amount to 9.4 times pay, while retiring earlier, at age 62, increases it to 13.5 times pay.


• Most “full-career” employees are on track to save 8.8 times their final pay, leaving a shortfall of 2.2 times pay. Full-career employees are those who have a potential career of 30 years or more with their current employer before retirement, and who are currently saving in their defined-contribution retirement plan, like a 401(k).

As you might imagine, I have several comments on this info. Here goes:

• Just to be clear, if you end your working career making $50,000 a year, they are saying you'll need to have savings of $550,000 at 65.


• Most people spend what they make, so I'm guessing that's why they used "final working salary" as the main number -- because it best estimates what people will need each year. But I'm guessing "annual cost-of-living" works too since it's what you actually spend each year. This can make a big difference if you make $80,000 a year but live on $50,000 a year.


• Obviously it makes a ton of sense that if you retire earlier, then your multiplier is larger.


• I'm not surprised that most employees will fall short of the 11 times. Given how bad the finances are for the average American, I'm surprised it's only a 2.2 times shortfall.


• BTW, 2.2 times is a HUGE amount. It's a 20% miss.


• I wonder what the mid-40's multiplier is. I'm thinking I could be close to retirement right now if it's not too large. I have 11 times already covered, but I'm not planning on waiting until I'm 65 to retire. If it's an extra 2.5 times for every three years (the difference between the 11 at 65 and the 13.5 at 62), then the number at 50 would be 23.5, which is a very big number. That said, I should be there by the time I get to 50 (sooner if the market would ever take off!).

How about you? What's your take on the formula? And how do you stack up against it?

Comments

[RichUncle EL]

If that is the case, I have to play catch up cause I am not close to 11 times. I am in my thirties so at times I feel time is running out.

[Lance@MoneyLife&More]

I am nowhere near that but I am also in my mid twenties. I have about half a years earnings but live on much less than I earn.

[MattJ]

All I have to do is quit my job and make a career change to a full-time minimum wage position, and I will have achieved the 11-times final salary goal!

[Matt]

Are they talking about gross income or net take home pay?

If it is take home I am all ready there ( becasue I am maxing out on 401k my take home is low) but if you are talking gross then I am not not quite there and in my opinion I am REALY not sure 11 time or 13.5 times is enough.

In my opinion I need 16 times my gross income before I even think of retirement. That is my number.

[Rick Francis]

If you had someone making 50K today retiring with 11X seems too low to me as: 550,000*4% => 22K/year. I guess they are assuming the remaining 28K will come from social security. I wouldn’t want to count on the majority of my income from social security- as that seems too risky with the solvency problems.

I don’t think that calculation would work for very high salaries either as there are cut offs for social security.

It would also not work well if you are retiring far before 59.5 years old- because you wouldn’t be able to withdraw funds from retirement accounts without penalties.

I also don’t like how they state the amount- 11X final salary because too many people will take 11X their current salary to get their savings target. As salary should at least grow with inflation, which makes the real target is 11* ((1+inflation rate)^number of years till retirement) which is generally much larger. For example if you are 25 years from retirement and inflation is around 3.5% your target is 26X your current salary!

It would be better to give savings targets based on age and some conservative rate of return (say 6%), i.e. at 65 you want at least 11X, at 55 you want at least 6X etc.

@RichUncle El
It would be very unusual to have 11X salary in your 30es- as it takes time to build up a nest egg.
The growth of a portfolio is non-linear because the growth of your portfolio goes up dramatically as your portfolio grows. Most people are horrible at estimating compound growth so I would use a calculator. The savings you have today have much more time to grow for example if you have saved 1X your current salary and let it grow for 30 years with a 7% rate of return you end up with 7.6X. That is why starting to save early is really powerful.

-Rick Francis

[jdgjdg]

Any such simple metric is fundamentally broken. Rick Francis points out one reason why. But, I'll go ahead and play along.

We are currently around 11X in our 40s. While we could get by on investment income now, it would be tight, especially when our kids go to college. It also leaves little room for error.

My target is around 33X. That's partly because our plan allows for a 50% market crash. So, that's equivalent to around 16X without such a cushion.

[Old Limey]

When I retired in 1992 at age 58 our investment portfolio was only 4.3 times my annual salary. Now after 20 years of retirement it is 94.5 times my annual salary and increasing every year, an APR of 17.11%. We have lived primarily on our pension and SS checks and have made very few withdrawals from capital.

I think the difference is due to a pretty good stockmarket between 1992 and when I got out in March 2000, switching primarily to hi-yield bond funds between then and the end of 2007 when I switched totally into CDs, and muni and corporate bonds. However without the database to which I have subscribed since 1992, its charting and analysis software, and my own comprehensive analytical investment program, I would have ended up like most Buy and Hold investors that held something like Vanguard's S&P500 fund VFINX which with dividends reinvested has made 340% (ANN=7.888%) since I retired 20 years ago.

[Jonathan]

Any metric that is based on your salary and not your expenses is fundamentally flawed. Someone who spends more than they take in and each year their debt increases needs a much larger cushion, in terms of multiples of annual income, than someone who lives on 50% and saves the rest.

For me, retirement requires a lot of non-W2 income - well in excess of my expenses - through a tangible asset like real estate. I wouldn't be comfortable with less than 2x my actual living expenses coming in as investment income. No other numbers really matter to me.

[Apex]

@Old Limey.

I don't know a lot about muni's but I am curious if your muni investments are at all affected by the recent city bankruptcies in CA?

How do you assess the current risk of muni's in light of the financial difficulties of a number of local government entities?

[Old Limey]

@Apex
I'm pretty discerning about the munis that I buy. Currently I have 104 groups of different munis. Munis also carry ratings by the various agencies so I always take those into account when I am making my selections. Most of the munis also carry insurance and are not issued by small cities so I am not too worried about a default.

[Old Limey]

@Apex
One other thing I failed to mention is that by buying my muni bonds at Fidelity's website I use a screen designed by Fidelity's Bond Group that in addition to offering only "Tier 1" bonds, they also conduct a "Price" test and a "Risk" test before a bond even makes it into the muni bond inventory available for their customers to purchase. I have all of our family's investments at Fidelity because of their long and unblemished record.

[cmadler]

@Rick Francis: I think this metric is assuming depletion of principal over time. If it were a sustainable withdrawal rate, it would be the same multiplier regardless of age. But this suggests 13.5x at 62, 11x at 65, and 9.4x at 67. That suggests that you would be expected to deplete by about 0.8x per year...which means you would run out of money at about age 79. It could probably stretch farther than that, but would almost-certainly run out somewhere in the 80s.

[Catherine]

In the comments section on the Times' site is the very best comment ever regarding what is needed to live in retirement. It is something to the effect of "Ask someone who is doing it."

There are regularly published articles and studies by experts using formulas or simulations that are interesting but IMO aren't nearly as useful as a good long conversation with a few seniors who are walking the walk at a variety of income levels.

[Old Limey]

Catherine:
We have been retired since September 1992.
We receive $39,822 (gross) in pension income every year.
We receive $25,915 (gross) social security income every year.

That $65,737 annually when you have no debt whatsoever and there's just the two of you provides a very comfortable life. We are still living in the home that we bought for $107K in 1977. It's 4br, 3ba, on a 12,000sf lot in the heart of Silicon Valley with property taxes of $2,318/year and now worth $1.1M.

We have investment income (tax exempt & tax deferred) that is over 5 times greater than that, but these days we just reinvest the income since we ended our overseas travelling in 2010. Prior to that we used to withdraw a little for vacations, particularly when we started flying business class.

The factors that have provided us with an excellent retirement have been:
We have stayed married for 56 years and are both healthy, and like 2 peas in a pod.
I worked for 36 years as an engineer, my wife worked part time for 23 years as a teacher's aide.
Our three children have been self supporting ever since leaving home.
We are both frugal by nature, a consequence of living in England through WWII and being both raised in working class families where frugality was a necessity.

I don't believe that our experience can be easily duplicated today. Both the world, the USA, and Silicon Valley have changed greatly since we were born in 1933 and 1934.

[billyjobob]

I guess I'm doing fine. 14.8 x saved. No debt. I'm 56 years old and expect to retire before 60. I spend less than 50% of gross each year. Still, I think I'd feel better if I had more. Maybe like 25x and I would really feel safe.

[Old Limey]

billyjobob
You're in great shape!
I don't need to tell you that at age 56 and maybe 4 years away from retirement the important thing is to take very little risk with that 14.8 X Salary saved up. For a nice comfort level I would try to get that big chunk of money working for you so that the income from it will greatly lessen any withdrawals you have to make from your principal. Of course I know nothing about your life or your circumstances so cannot be more specific. If you can find a municipal bond fund that only invests in bonds that are also tax free in your state that would help. I'm in California and BCHYX is the best one available for me.

[Mike Hunt]

At age 39 I have about 11X of gross salary in different liquid assets. However because we spend very little as a percentage of salary it equates to a far higher number in terms of years of living expenses.

I agree with FMF that you don't want to retire too early as even though there is some passive income coming in, it is very hard to replace the level of income brought in by a well paying career. The opportunity cost of walking away is very high.

-Mike

[Old Limey]

Mike:
Knowing you, as I do, You are already on a great trajectory to a wonderful retirement. You're on a path that cannot possibly fail and I wish you all of the continuing happiness and success in the world.

I actually retired about 6 months before I wanted to. I was hoping to work for that extra 6 months in order to bump up my pension by going from 32 years to 33 years. However since the Cold War had just ended the aerospace company wanted to reduce the number of workers and offered all salaried employees a Golden Handshake to retire in September 1992. The handshake was just too good to pass up. My old company had over 33,000 workers in Sunnyvale California at its peak and was the largest employer in what is now called Silicon Valley. The number of employees reached a low of about 5,000 workers after I left but has since increased.

[Mike Hunt]

Old Limey,

You really did time things perfectly. Thanks for the good wishes. There is a lot in life that is attributable to luck so I hope continue to have luck in life.

I can say that the following the basics of what this site is about (focus on your career, spend much less than you earn, and invest the difference) can pretty much guarantee a good retirement- it just depends on the year taken.

-Mike

[fugal saver]

I heard that 33X your final expense would allow a 4% withdrawl rate without drawing down your principle. At 56 we are on target for that since 33% of my current salary is going for retirement and the kids college savings.

[Catherine]

Limey:
Sounds like you've done all the right stuff.
At the other end of the economic spectrum is my mother, doing quite well on under $20,000 annually. She gets no pension, only Social Security. She has investments and savings, but never touches it. From her income, 1/3 goes toward property taxes, 1/3 toward health insurance, utilities and food.
She gives nearly 1/3 to charity.

What makes this workable for her is great health and home ownership. She's in her 80's and takes no medications. Her home is owned outright, as it has been for 40 years. The dividends from these two things are more valuable than almost anything else.

[getagrip]

11 times your full salary seems to make no sense, even if you plan on drawing all the money out after so many years. In your example of $50K final salary and $550K nest egg, if you drew down to $0 earning 4% above inflation, to generate $50K a year for 30 years you'd need about $860K and for 20 years you'd need about $680K. Both significantly above the $550K number they are proposing. The only way I can see this work is assuming social security payments, a higher interest rate, playing with taxes owed, or some combination of those.

I'm on track for about 13 to 14 times what I figure my final spending will be, excluding SS and any pension. Just by adding in SS at 75% of potential benefits bumps it to 18 times and then adding in 75% of anticipated pension bumps it to nearly 28 times. That's also assuming I don't save additional money outside of retirement, don't tack on another year or two of working, don't downsize the home and take out equity, and don't significantly increase my salary beyond inflation between now and retirement.