Jean Chatzky’s retirement savings factor

Earlier today, I shared J. Money’s lifetime wealth ratio, which is calculated by dividing your current net worth by the your lifetime income. If your net worth is $100,000 and you’ve earned $1,000,000 during your career, then your lifetime wealth ratio is 0.10 (or 10%).

I pointed out that this idea is similar to a benchmark suggested in The Millionaire Next Door. The authors of that book say that your expected net worth should be roughly 10% of your age multiplied by your gross (pre-tax) income. If you’re 35 years old and earning $50,000 per year, your expected net worth would be $175,000.

For me, exercises like this are fun. They’re a way to gauge progress in a world where we don’t really talk to each other about our financial situations. Apparently, not everyone agrees.

Last week, financial journalist Jean Chatzky tweeted a guideline of her own:

The response on Twitter was hysterical (as in “overwrought”, not as in “funny”):

This guideline isn’t Chatzky’s invention. It actually comes from the retirement arm of Fidelity Investments. Fidelity in turn based these targets on stats from a variety of U.S. government agencies. According to Fidelity:

Our savings factor rule of thumb is based on some key assumptions: You start saving a total of 15% of your income every year starting at age 25, invest more than 50% of your savings in stocks on average over your lifetime, retire at age 67, and plan to maintain your preretirement lifestyle.

The result is what Fidelity calls a “retirement savings factor”, and you can calculate yours by using their retirement savings factor calculator. (My retirement savings factor is 11. That is, in order to retire at age 62 — the target I entered — Fidelity thinks I need to have 11x my current income saved. But this exercise doesn’t work for my situation.)

Like the folks on Twitter, I don’t like the Chatzky/Fidelity guideline — but for a different reason. Long-time readers know that I hate hate hate retirement advice that bases financial needs on income rather than expenses.

Instead, I think you should base your planning around your current expenses. One guideline I promote is this: Aim to accumulate wealth equal to 25x your annual expenses before leaving the workforce. So, if your household spends $30,000 per year, then you can probably retire once your net worth hits $750,000. (This is a rough guideline. Individual circumstances will vary.)

Whenever you see benchmarks and guidelines and rules-of-thumb like these, don’t take them as absolutes. They’re targets. Each of us is different, right? We each have different circumstances. If you’re not where Chatzky and Fidelity suggest you should be, that’s okay. Don’t feel bad. But use this as motivation to get closer next year — and the year after.

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