A Closer Look At Money Magazine’s Retirement Benchmarks

In my recent review of the April 2007 issue of Money Magazine, several people were quite interested in my comments on the early retirement article that appeared in the magazine. In brief, here’s the part that was interesting:

Assuming you want to retire at age 60 and plan to have no pension and no job in retirement, you need to have…
1.6 times your salary in savings at age 35
3.5 times your salary in savings at age 40
5.8 times your salary in savings at age 45
8.5 times your salary in savings at age 50
11.9 times your salary in savings at age 55
16.0 times your salary in savings at age 60

These figures assume a 35 year retirement starting at age 60 with 80% of your current salary each year, and with Social Security kicking in at age 62. It also assumes a 4% annual real rate of return (that means it includes inflation) on your investment and that you’ll withdraw 4% of the total balance the first year and then the same dollar amount adjusted for inflation each subsequent year.

So let’s look at what this looks like for a real person. Joe has a salary of $50,000 and wants to make sure his portfolio is doing good.

At age 35, he should have $80,000 socked away. This is a tough one to get to – Joe’s better off starting as early as he can to get to this number. If he puts $5,000 away each year starting at age 25 in an account that earns 9% annually, he can get to that number, though. $5,000, broken down, means a little less than $100 a week, so putting away $100 a week is a good place to start. If you start later, you need to put more than that away each week: if you start at age 28, for instance, you need to be socking away $160 a week.

At age 40, he should have $175,000 socked away. If Joe made the threshold at age 35, then he can make it to this threshold by socking away about $120 a week into that same 9% account.

At age 45, he should have $290,000 socked away. If Joe made the threshold at age 40, then he can again make it to this threshold by socking away that same $120 a week into that same 9% account.

At age 50, he should have $425,000 socked away. That same $120 will actually be getting Joe a little bit ahead of pace: if he met the threshold at age 45 and keeps socking away that $120 into that same 9% account, he’ll be just shy of half a million at age 50.

At age 55, he should have $595,000 socked away. With that same $120 a week plan, Joe will have almost $800K socked away at age 55. That’s pretty close to what he’ll actually need to retire at age 60.

At age 60, he should have $800,000 socked away. With that same $120, Joe will have $1.2 million in the bank.

What about raises? The numbers in Money Magazine take both inflation and raises into account. Each time your salary goes up, your actual numbers that you need to hit will go up as well. That’s why proportional saving is the key: it ensures that your retirement will grow to match the lifestyle your salary affords you.

So… how much should I be saving for retirement each week if I want out at age 60? It depends on your age. If you can get 1.6 times your annual salary into retirement savings at age 35, then you need to be putting about a quarter of a percent of your annual salary into your retirement plan each week to be able to retire at age 60 and just enjoy life. So, if you make $50,000 a year, that means an investment of $125 a week into your 401(k) and/or Roth IRA should be sufficient to lead to an enjoyable early retirement.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. TiP says:

    Hasn’t the whole concept of retirement, as in a total leisure lifestyle without any income at all, sort of become passe at this point? I don’t know of many people who think they’ll be retiring at 60, let alone 65. Certainly most of us expect to work at least part time even well into our 70s.

    It seems to me that a better plan than retirement is to find some kind of work that you enjoy doing and that you’ll be able to do well into your 70s. I suspect that most people 45 and under won’t be “retiring” in the oldschool sense until about 75, so best to find something you enjoy doing.

    I also don’t think that the oldschool retirement is healthy at all. Best to keep body and mind active.

    Oh, and one more point: I often think that retirement is wasted on old age. Better to take that year or two off when you’re still healthy enough to travel. I did this a few years ago when I was 39 – took a year and a half off to travel (inexpensively), study, write, etc. I called it my first retirement. I hope to take another year or so off around age 50.

    My father retired a few years back at 65, but my parents are not able to travel because of my mother’s back problems. That showed me that waiting to enjoy life really isn’t a good plan. Best to enjoy now.

  2. Chris says:

    The problem with the plan of working till 75 is that often times it’s impossible. What happens when you have back problems and can’t work in that ideal shop in that flower store any more? You have to have something to fall back on, and it has to be a big something to last you the rest of your life. Yes, lots of people work into old age, but the difference is if they are forced to or not.

  3. nitsuj says:

    Nice article just one question … how realistic is the 9% interest?
    You should/could get this from Stocks/funds but it’s not definite.
    So how much can you be sure of getting… about 4%? maybe 5%?
    How do the numbers look then? – I’m not saying the numbers are wrong just asking for a ‘realistic’ comparison.
    Thanks

  4. Craig says:

    So where is someone going to get this hypothetical 9% per year on their savings? The stock market has gone up about 13% in the past 8 years total, not per year. (^DJI was at 11,114 on 4/6/00, it’s now at 12,609.)

    Bonds are paying about 3.4%. Real estate is nose diving.

    Here’s another problem with this formula: Assuming I get to 3.5 times my salary at age 40 (I did), how do I get to 5.8 times my salary by age 45, in just five years? After taxes, I only take home 3 times my single-year salary in five years, and there’s stuff like food and housing to pay for from that.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>