Salary vs Retirement Balance

​By Brad Thomason
 
 
A Reader Asks: 
 
Dear Sir,
 
If my salary is X, how many times X should I have when I retire?
 
OK, a reader didn’t actually ask that.  I fell for some click bait in my YOUTUBE feed and watched a brief video discussing how 8X is considered the “standard answer,” but the real answer (for those in the know, wink, wink…) was probably more like 4X.
 
It was a total junk video filled with nothing (that I recall) but bad information and dangerous advice.
 
So I’ll provide you with an actual answer:  There isn’t an answer because your salary is not a relevant factor. 
 
The basis of this question is some sort of implicit notion that what you make and spend now and what you will need to make to keep on spending it in the future, is correlated.  Clearly they are related.  But not in any sort of direct or systematic way.  Certainly not in any way that would allow one to distill some sort of universal constant that could be stated as a simple multiple of working-year earnings.
 
To dig a little deeper, hopefully as you approach retirement, what you are spending is less than what you are earning.  Hopefully by quite a wide margin.  Otherwise, at the height of your earnings power, little of it is going into savings; and you are funding a lifestyle which is going to be a lot harder (or impossible…) to maintain in the future. 
 
Beyond that, a lot of what you spend money on during your working years goes away once you retire.  Big stuff like 401(k) contributions, health insurance, and the taxes associated with a lot of earned income; as well as smaller stuff like commuting expenses and eating out all the time, to name a few.
 
For these reasons, we always use expected budget as the basis for doing projections.  Expected budget, stated, not in today’s dollars, but in the expected dollars of the future start date, by the way (can’t forget about inflation).  But not present-day salary. 
 
Retirement is ultimately about what you are going to spend in the future, not what you earned in the past (or even the present, if you are still working).  So trying to relate it to salary levels simply requires too many adjustments and tweaks.  Obviously, after you have all of the data in front of you, you can do a simple calculation to see how many times salary your required nest egg would equal to.  But that’s hardly the same thing as doing it the other way around; and what you came up with would differ substantially from what your neighbor would get, too.
 
So don’t worry about trying to denominate savings requirements in terms of current earnings levels.  The two have little to do with each other, and there are direct approaches to getting the answer to the savings question which are both simpler and much more accurate.
 
There you go.  Problem solved.