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Rekenthaler Report

There Are No Universal Savings Rules

Too little for one person may well be too much for another.

The Trend Killer
We now know the length of the Twitter lifecycle: 13 days.

On May 12, MarketWatch retweeted an article that had been published four months earlier (as well as previously tweeted). For its part, that article cited a Fidelity chart that had been printed six months previously. Twitter thundered. Within a week, the tweet's recommendation that Americans hold twice their annual salaries in retirement savings by age 35 had become so popular as to be an Internet meme.

Those memes are now but period pieces. This columnist addressing a tweetstorm is like grandpa donning skinny jeans--whatever relevance the trend once possessed, it no longer does. The cool is gone.

On Tuesday, Morningstar's Karen Wallace tackled the initial question: Is such a thing even feasible? (Much of the Twitter banter consists of incredulous denials.) Yes. Per Karen's work, achieving a $100,000 retirement egg by one's mid-30s, while earning $50,000, does not demand heroic assumptions. The contribution rate must be steep--15% of pretax salary per year--and the financial markets somewhat friendly, but no miracles need occur.

To that topic, I can add little. 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. Thus, despite Karen's wish for a spreadsheet duel (she likes a good squabble), I accept her findings.

Nice to Have
What I don't accept is the notion that people "should" plan for such an amount. That is a Twitter invention. The original Fidelity source acknowledged that its figures were suggestions, not imperative. Some people might attempt to have more than twice their salaries saved by age 35, while others quite reasonably could target less.

Lest we forget, Fidelity is an asset manager. Its views on retirement savings resemble PepsiCo's on soda consumption, and Morningstar's on the importance of investment research. Some is good, more is better, and a mountain's worth is best yet. Yet Fidelity did not fully, unabashedly recommend a fixed savings amount for every American worker. The Twitter debate went where even Fidelity, a more-than-disinterested asset manager, would not.

And Fidelity went further than I would go. I would label its 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. Per Fidelity's numbers, that would mean $45,000 in annual payouts for someone who retires with a salary of $100,000, plus another $27,000 in Social Security, for a total income of $72,000.

(That Social Security payment is merely a rough guess, since Fidelity's example is of somebody who retires four decades from now, and we do not know what Social Security policy will be. Then again, neither can Fidelity's hypothetical Joanna foresee her future final salary, or her future salary path. So, $27,000 seems as reasonable a figure as anything else.)

That is nice to have. I would enthusiastically recommend that somebody with a $100,000 peak salary have a $72,000 retirement income. (Better yet, be married to somebody else who made $100,000, and receive $144,000 as a couple.) However, "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 graduate degree. It is nice to have 10 times one's salary at retirement. Nonetheless, tens of millions of Americans enjoy full, successful lives without achieving any of those items.

This is not to criticize 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?

Exceptions to the Rule
Even if one were to grant that $72,000 is the minimum "responsible" retirement income for somebody who makes $100,000--which I certainly do not--there are many exceptions to Fidelity's proposed savings guidelines.

Obviously, those guidelines overstate the need for anybody who will receive a traditional pension. There aren't many such plans left in corporate America, and those that do exist are largely being phased out, so assuming their nonexistence is a first approximation of the truth for private employees. But not for the 22 million local, state, and federal government employees.  

They also aren't realistic goals for occupations that require heavy early investment in human capital, or which have steep salary curves. For the first case, consider a cardiologist who has a net worth of zero at age 35. He is doing well. The absence of debt all but ensures that he will retire a rich man. An aspiring law partner illustrates the second case. What matters most for her retirement is not how much she owns at age 35, but instead whether she achieves partnership.

Also landing in that category are those who are paid, either primarily or secondarily, in equity. The small businessperson who takes out a loan to start a firm, and who spends her first few years in building a clientele, probably won't have much of a retirement portfolio at age 35. However, she may have a very substantial one at age 65. The same holds for corporate employees who receive stock options. Those are retirement savings (albeit of a riskier form). That they do not fit neatly into the "financial assets" box does not negate their value.

Wrapping Up
There are many additional exceptions, which need not be listed. The upshot is clear: This Twitter exchange was soundbite. The discussion that it generated was useful, in that it shocked younger workers into thinking about retirement issues. The memes were fun. (This one was entitled "How to Save Twice Your Salary.") But ultimately, the exchange was flawed, because the initial point was invalid. It was an idea that was pushed further than could be sustained.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.