#By35: The Financial Advice Twitterstorm
Have you heard? The world expects you to accomplish great things by the time you’re 35. For example:
Or one of my favorites (if you disagree, ask Oakhurst Dairy drivers how they feel):
There were so many “by 35” tweets that Jessica decided to tell them to stop.
Turns out, this all started with the tweet below.
And as you can see, people didn’t quite agree. The twitterverse went into overload with “By 35” tweets mocking the advice above. The article was originally published in January 2018, but it didn’t get attention until it was retweeted in May of 2018.
So why the twitterstorm? It’s probably because most people don’t have anything close to what the advice recommends. A 2013 study from the Economic Policy Institute found that nearly half of American families have no savings at all. So being told that you should have twice your income saved when you have almost no savings can be disheartening.
But just because the average American isn’t following this advice doesn’t mean that it’s bad. Nearly 80% of Americans don’t meet the recommended federal guidelines for physical activity. Yet you seldom hear arguments against getting 150 minutes of exercise per week. So how did they come up with the recommendation to have twice your income saved by 35? And is it really that unreasonable?
If you read the article, the advice actually comes from a Fidelity study that gives some benchmarks for how much you need to save in order to retire. The study looks at what they call the “savings factor” (not to be confused with savings rate). Your savings factor is how your savings compare to your income at various stages in life. The study provides some general guidelines about how much you should have at different ages. In general, you should “aim to save at least 1x your income at 30, 3x at 40, 7x at 55, [and] 10x at 67.”
As with most generic financial advice, it makes some assumptions. Those assumptions include:
- starting to save at age 25
- saving 15% of your income every year
- investing those savings into a target-date mutual fund
- retiring at 67 and planning through age 92
Fidelity used all these factors to come up with their savings factor recommendations above. If you want to see where you stand, you can use Fidelity’s calculator on their website to put in your own numbers and get a more personalized recommendation.
If you met the above assumptions, the original advice to have twice your salary saved by 35 doesn’t seem so far fetched.
If you didn’t start saving at 25, then you’ve already squandered a huge advantage. The age when you start saving has an enormous impact on how much you’ll have in retirement. If you get the market average 9% annual return, you can expect your investments to double every decade. If you start saving at 35 instead of 25, all else equal, you’ll have half as much money for retirement. When we look at someone who starts saving at 45, they’ll only have a quarter of what the person who started at 25 would have. Time in the market is extremely important so it’s vital to start investing your savings today if you’re not already.
Fidelity used target funds for their analysis. These funds change the makeup of the portfolio to match their recommendations for individuals looking to retire in specific years. For example, a 2060 target portfolio is likely heavily invested in stocks. Over time, this same portfolio will slowly shift it’s assets away from stocks to more stable investments such as bonds. This is in line with their recommendation to have a more conservative portfolio as you get closer to retirement.
These funds are good for individuals who want to put the minimum effort in and let someone else manage their portfolio. But these portfolios will return less than the market averages due to their fees. You can make nearly the same portfolio yourself and save thousands of dollars in fees which will give you a better return.
The Fidelity assumptions are also very conservative. They ran their numbers to determine some guidelines that ensure people don’t run out of money (after all, that’s what they’re paid to do). But based on the numbers I’ve run in the past, I think they’re being too conservative. For example, when I looked at savings rate, I found that a 25 year old saving 15% of their income could retire after saving and investing for 28 years. That’s retiring at the age of 58, not 67!
In reality, the age that individual could retire is likely to be somewhere between 58 and 67 since I found the “floor” so to speak, assuming things go well, while Fidelity found a comfortable “ceiling” for some of the worst case scenarios.
So it turns out the advice isn’t all that bad or unreasonable. If you want the freedom to choose what to do in retirement, you need to make a plan and determine how much you need. Having benchmarks such as these along the way can help you determine if you’re falling behind and keep you on track.
Once you have an idea of how much you actually need to save, you should start investing and contributing to your 401(k) and IRA. Even if you don’t quite meet the benchmark set by the advice, it’s never too late to start planning and saving. Just as the original article from Fidelity ended, “don’t be discouraged if you aren’t at your nearest milestone — there are ways to catch up to future milestones through planning and saving… The key is to take action.”
