Well, it wasn’t long until some of the other names in financial literacy and personal finance jumped in on the “save twice your salary by 35” debate. An author on Morningstar recently proved how you could feasibly accomplish such an endeavor — you can read about it here.
If you’re just joining the conversation, we’re talking about the recent discussions (mainly on social media) about the advice to save twice your salary by age 35. We mentioned it in our last blog post (here) and you can check out the original MarketWatch article as well as the Fidelity piece that provides the background information. The gist is simple: You should target an income replacement in retirement that is presumably provided by meeting savings hurdles throughout your working years. For example, the Fidelity piece asserts that you should have 2x your salary saved by 35 and 8x your salary saved by 60.
Our position is that the salary savings rate is a reductionist approach to a really complex issue, and it can lead to people getting paralyzed to the point of inaction due to the fact that they may feel so far behind the savings hurdles — especially given the growth of student (and other debt). Does that mean you can’t save AND pay down debt? Not at all… our point is simply that your retirement plan is more than an amount of money at a particular age.
Our beef with the Morningstar article is that it addresses the wrong problem. At first glance, it appears to be an example of mental set, or the tendency to reuse a solution because it’s worked (or has been theorized to work) in the past. We see this with typical financial plans that don’t address demographic shifts, spending habits as we age, longer life expectancy, the desire to keep working in some capacity during retirement, the possibility of starting a business, or simply don’t take into account your value set or focusing on what’s truly important to you. However, when you look closer, the problem isn’t how you should save 2x your salary by 35, but rather if or why you should save that amount. As we mentioned before, it’s a fine — and very rough — starting point, but then again, we wouldn’t want our surgeon doing his work with a chainsaw.
Here’s a thought experiment for you. It’s about as far from quantitative as you can get and it can be somewhat difficult to really work through honest answers if you’re not committed to a little soul-searching. Touchy-feely enough for you? Great… let’s get to it.
A smart guy named George Kinder is credited with starting the life planning movement, which on a very simple level focuses on your relationship with money in order to pursue the things you’re really passionate about (not just accumulating wealth). He has three questions to frame money in the context of what’s important to you. Here are his three questions:
- I want you to imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours.
- This time, you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it?
- This time, your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What dreams will be left unfulfilled? What do I wish I had finished or had been? What do I wish I had done? What did I miss?
As you seriously think about these questions, does your end-state change? That is, do you still want the same “things” that you originally thought you did — or did your answers reveal a desire for something more intangible or experiential? Regardless, we’re fairly certain that saving for an arbitrary portfolio value by a certain age isn’t the important aspect here. Nor is whether or not you can mathematically achieve that value. Instead, we encourage you to think about the “why” and “if” as seen in the context of your life’s purposes and passions.
Guess what… you may find that pursuing a savings rate that meets those hurdles laid out by Fidelity is completely aligned with how you’re using money as a tool to further your life’s passions. You may need to save twice your salary by age 35. However, you’ve looked at the problem from the right angle… you’ve started with why. And that, in our opinion, is the first step toward a great financial plan that’s truly unique to you.
(With a tip of the hat to Simon Sinek)
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