Double Your Salary in Savings by Age 35 or Double Your Savings from Salary

This last Monday (May 21st, 2018), Buzzfeed highlighted the Twitter responses to a recent Marketwatch article that said by the time you are 35 you should have saved twice your salary. Some of the Twitter comments were very funny. Here are a few from the Buzzfeed article.

By the time you’re 35 you should have saved at least half your sandwich for lunchtime instead of noming it at 10am.

By age 35 you should have approximately 10 times the existential dread you had when you graduated high school.

By age 35 you should stop paying attention to condescending life advice from strangers writing think pieces.

While accomplishing such a feat seems incredible, there are reasons why it is a good benchmark. First, it is a reasonable savings rate for anyone leaving college. The math follows. Second, it’s necessary unless you want to give up much more of your income later.

To have twice your salary in savings in ten years, with a reasonable rate of return, you would  need to save 15.0 percent of it. That is common advice for those beginning to save in their twenties. If your employer matches your contribution to your retirement account, you could save less.

Say your starting salary when you left college was $45,000. With annual increases, you now make about $54,000. Your employer would contribute 5.0 percent to your company 401(k) if you contributed at least that much. You only have to contribute 10.0 percent of your salary to save 15.0 percent. You would contribute $375 each month to start, and your employer would contribute $187.50. Your and your employer’s dollar contribution would grow with your salary.

Your share of the contribution would be less if you contribute pretax dollars in a traditional 401(k). With a combined state and federal tax rate of 24 percent, your paycheck would only have been reduced by $285 per month to start. For $285, you would be saving $563 every month with your employer match.

At the end of ten years, assuming a 7.0 percent rate of return, your balance would have grown to over $105,000, which is almost double your current salary. Your contributions would have totaled $48,781 before tax and $37,073 after tax. With the employer match and market returns, doubling your money in ten years is very possible.

If you haven’t been saving a total of 15.0 percent of your income, between you and your employer, prior to reaching age 35, you’ll need to save much more after to be able to maintain your current lifestyle when you eventually do retire.

If you begin saving in your 36th year, to accumulate the same amount of money by age 65 as you would have if you started saving at age 25, you would need to save a total of 28.0 percent of your salary, using the 7.0 percent return assumption. If your employer matches 5.0 percent, you still have to contribute 23.0 percent of your salary. You would need to give up more than twice as much of your take home pay to arrive at the same balance.

On the surface, to have saved twice your salary by the time you’re 35 seems outlandish. Who could save that much? But if you take into account market returns, it’s not as crazy as you first thought. Add in typical employer matching contributions, and it is down right doable. If you didn’t manage it, you can still get to where you need to be. You’ll simply need to save more.

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