Throwing retirement savings factors out the window

Throwing retirement savings factors out the window

The Millionaire Next Door suggested your expected net worth should be about 10% of your age multiplied by your gross income.  Example:  Net Worth = (Age 20 x 0.10) * income.

So, that formula looks something like this (gross income assumed):

AgeGross IncomeNet worth

While an interesting exercise, this retirement savings factor means nothing – other than some target it might offer some savers.  Sounds like I’m not a fan of this target eh?  You’re right.

This is because we’re all different.  We all have different financial circumstances throughout our lives and just because someone “says” you should have a certain amount of net worth doesn’t mean squat (and you should).

For example, most 20-somethings would be fortunate to be earning close to $50,000 per year by the time they are age 30.  Even if they earn that, or more than that, most of them might not be debt-free due to the shockingly high costs of post-secondary education. In this case they are likely to have a negative net worth throughout their 20s.

Looking at another example, most Canadians will never make more than $100,000 per year.  Even if they do, it takes years of saving and investing discipline to grow your retirement savings.  Many adults also have competing priorities associated with growing a family as well. That means they take on debt (hundreds of thousands of dollars of it) likely in the form of home ownership.

My advice to you is to never take any financial guideline too seriously.  Don’t beat yourself up when you read this stuff.  Simply make a mental note of it, kindly thank the financial guru for this information, and use it as one of your many inputs to chart your own successful financial path.

For the record, I’m certainly glad we didn’t use this retirement savings factor as our measuring stick.  We wouldn’t be where we are today if we always followed what other people thought we should do in life.

48 Responses to "Throwing retirement savings factors out the window"

  1. Thanks for the post Mark. As you have pointed out the issue with this formula is that age increases linearly while investments which compound increase exponentially. This is a relevant graph which could apply to the process of saving for early retirement:×658.png

    As for your post regarding 20-30 year old’s being “lucky” to earn $50k per year I am not sure if you are working in CAD or USD but in San Francisco, NYC, or Washington, D.C. many entry level jobs pay $50-60k. I expect to earn over $100k/year by age 30 in these types of locations. Those with programming skills are doing even better earning over $100k starting in these locations.

    Of course, the tradeoff is high rents. This can be overcome by having a roommate and saving the extra income for living in a city with the wage premium. I have always believed I am better off living in a high cost of living city somewhat cheaply than moving to a low cost of living area with a lower salary. This is also the case because many goods are priced more-or-less the same independent of location such as cars, cell phones, college (for everyone in the USA), etc. Plus, someone in a HCOL area saving the same percentage of salary will be saving more in absolute terms than someone in a LCOL area.

    I very much agree on not following what others in our life think we should do. If that was the case readers would be up to their ears in credit card debt with a negative net worth – a typical American lifestyle 🙂

    Wishing you the best.

    1. Thanks for the detailed comment Ray.

      I think the higher-salaries (in USD) in San Francisco, NYC, or Washington, D.C. are not the norm. Thoughts?

      I would agree, I’d rather live in a HCOL city and trying to live somewhat frugally than lower cost of living city coupled with a lower salary.

      1. The higher salaries are not the norm in the country but are normal for those locations. Choosing to live in HCOL area is a significant lifestyle choice some people are unwilling to make given the consequences of having so little personal space, or if they are used to a rural lifestyle.

          1. I think Canada is in a huge housing bubble similar to the USA before 2007 and the bubble will burst sometime in the next 3 years. Should be able to get more reasonable values on housing and stocks then 🙂
            Check out Canada home prices to income:
            and household debt to income:
            And the trend is not difficult to make out.

            1. Fair enough. Time will tell if you are right Ray. My wife and I are considering moving in a couple of years closer to the city. It will be interesting to see if we get caught. I really hope not 🙂

  2. Yep, I agree that following any model blindly is probably a recipe for mediocrity. And everyone’s situation is so different…

    However, I somehow see those formulas as inspiration to be better than others. So If I were a 30 year old something, my goal would be to have a higher NW than the 60 year old making twice as much as me.

  3. Great book. It’s been a long time since I read that one.

    The net worth rule, and a few others maybe not so great. I agree Mark it doesn’t work.

    It’s hard but we “try” not to compare ourselves to others and just set our own targets based on desired lifestyle/needs.

    1. No doubt you got to where you are because you listened to your mind and heart in life. You don’t need to compare yourself to others although I’m guilty of it from time to time. I’m far from perfect that way but I’m getting better with age…less comparisons.

      1. I think that’s true. We all probably do it.

        However I also found the closer we got to reaching our own financial goals/needs the more peace and comfort we had with our situation vs doing the comparison thing. Lots of others are in better shape and lots of others are worse off, but we feel comfortable enough and fortunate.

        We knew what WE wanted and went for it. You seem to be doing the exact same thing.

          1. I would agree. We’re far from perfect too and don’t have all the answers, but following our own path has certainly helped us stay grounded, focused and happy.

            Everyone has to figure out their own priorities, needs and plan themselves for a comfortable, reasonably secure and fullfilling retirement. So far so good here!

  4. This rule assumes (I think) that you own your home outright.

    I have been renting my entire life, and now that I’m retired, I’ll keep doing so. The upside of being a renter is that I have a generous nest egg that will generate income for all time. As a result, though, I don’t fit any of the conventional algorithms for retirement “success”.

    1. It depends Heather. I think it was originally associated with retirement savings/investments and not home ownership. That said, I would agree, if you include home equity in this calculation some Canadians are likely very house rich but cash poor.

      Continued success to you.

  5. Love the Millionaire Next Door. It was one of the biggest influences leading me toward the goal of financial independence. I would agree that some of the formulas in the book are interesting, but not the “be all end all.” I thinks it’s better to have a ratio to compare your annual expenses against your net worth. That gives a better indication of how well off you are against your spending rather than earnings. It’s all good, though. Tom

  6. I think the most ridiculous factor I ever heard is that you need 70-80% of your current income in retirement. We save more than 20% now and no need to save any more in retirement, we will not have mortgage, kids will have their own life, we don’t work so working related expense is gone too, most likely we will downsize the house so house related cost will be reduced, Also, I will pay much less tax. I really cannot understand where this number comes from. I will worry myself to death if I believed them.

    1. I think once the mortgage is done and you’re done saving for retirement, you can likely live off 50% of what you make now – at least I see it that way. Between our mortgage costs/expenses and saving for our retirement, our budget has us paying >$3,000 per month after taxes on those two items alone. Not trivial.

    2. I agree May.

      The most important factor is not past income- it’s expenses in retirement- what are they going to be, what are you going to do?

      Using past income is a general guide but doesn’t provide enough detail considering your debt, your family, employment costs, taxes, differences/desired lifestyle, housing, ratio of discretionary income to fixed, age of retiree, career income path, safety & variability of income, and probably many more important things.

      As it happends in retirement we currently live on ~70-75% of previous 5 yrs income avg. but about 40-50% of our peak incomes 15 years ago.

      1. Thanks, RBull. Your number really makes sense to me. I think we will be very comfortable if we could generate 40% of our current income through investment. There is still a long way to get there, but not unachievable.

  7. I tooked our Grand daughter’s DRIP, which she took contol of May 2016 and calculated the difference if she had invested in XIU rather than kept the BNS. She has been adding $100 per month since Dec 2016. The calculation is probably not 100% correct, but even so the difference is telling.
    There have been six Dividend payments since May 2016 from both.
    BNS Income started at $147.60 and is now $181.63 per quarter, 23.06% Growth
    XIU Income started at $110.60 and is now $110.65 per quarter, 0.05% Growth (actually no growth)
    Value of BNS from $13,593 to $19,392 or 43% Change
    Value XIU from $13,593 to $16,250 or 19.5% Change
    Gotto love the value of diversification.

    1. Cannew,

      I feel a better candidate for comparison, or to own if a small investor, would be PDC instead of XIU. PDC has had better diversification, dividend growth, performance and a better yield than XIU since inception in 2011.

        1. I don’t own it Mark, I prefer stocks. Pricey? Not compared to mutual funds, other comparable Canadian dividend funds or even index ETFs post Robo advisor fees.. As you know performance is always measured after fees and PDC does outperform its peers and Canadian equity indexes. Performance should be considered over cost.

          1. Fair Bernie re: performance over costs but PDC is a young ETF. Time will always tell how performance will be…

            Yeah, I’ve often thought about dumping some CDN stocks and going with more CDN ETFs, including via robo, but I just can’t do it. I simply see the same top stocks dominating the CDN market and I will continue to own them accordingly until they don’t.

          2. Bernie: Interesting choice. Not one of the 42 holdings has a current yield of less than 4%. 27 have yields over 5%, and 16 over 6%. Not that they are all bad, just that they are clearly pushing the yield factor. Have not looked at the growth of the yield but the price growth has been good for the past few years. But like you I’ll stick with individual stocks that offer DG and price growth will follow.

  8. “My advice to you is to never take any financial guideline too seriously.” Definitely when it come to “How Much You Need” or “Expected Returns” Projecting into the future and trying to follow some of those experts will get one no where.
    However, there is advice that makes sense, is easy to follow and you’ll see your progress over the years. Invest for Growing Income. It’s the advice I got from the Connolly Report and thankfully we have been retired, financially happy, for many years. Mark follows this route as he reviews his Monthly Dividend Income.

    1. It may not be enough for your retirement but it has been lots for ours. It depends on the kind of retirement you seek — it’s personal for sure. Just my 2 cents.

      1. I would think anyone in their 60s with >$600k in investments + CPP + OAS + debt-free is doing just fine personally. You can withdraw ~$30k per year with $500,000 in an RRSP at age 65 and not run out of money until about age 85 assuming 5-6% return.

    2. dividendgeek,

      As Gary said “it all depends on the kind of retirement you seek”. A safe 4% withdrawal rate plus CPP & OAS will provide you with a ballpark figure of $45K/year. Many consider that more than adequate for their needs once their home is mortgage free.

  9. “We wouldn’t be where we are today if we always followed what other people thought we should do in life.”

    The only person I can say I wished I had listened to more would be my father. Born in 1916 and growing up in the Depression, as well as fighting in WWII (1st Canadian Parachute Battalion), he had a perspective on finances and lifestyle in general that I would have done well to emulate more. Having said that, seeing his love of RRSPs and hard work has served me well. I don’t care so much of what others think. Best compliment I get is that I’m just like my father.

    1. Sounds like a great man and I’m sure has been very influential in you achieving your own great success.

      My father was also military and I hold much the same respect for what he’s done and how I saw my path evolve as a result.


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