Why Age-Based Savings Benchmarks Are Dumb, But We Look Anyway
Whether it’s healthy or not, we all make comparisons in many aspects of our lives – where we live, what we do for a living, what kind of car we drive, even how we raise our kids. But society doesn’t talk openly about money and so we look to the experts to set benchmarks and rules of thumb for where we should stand financially.
Related: How much of your income should you save?
One of the first personal finance books I read was The Millionaire Next Door by Thomas J. Stanley and William D. Danko. In it the authors study the characteristics of millionaires and compare the behavior of what they call prodigious accumulators of wealth – individuals who have a high net worth compared to their income – versus under accumulators of wealth – those who have a low net worth compared to income.
Average net worth by age
I was disheartened to read that as a 25-year-old earning about $50,000 per year, I should have an expected net worth of $125,000 to be considered an average accumulator of wealth (age x income x 10%). I had less than half that amount, which made me worse off than an under accumulator of wealth – certainly not millionaire material.
But I soon realized this was a flawed and useless metric for anyone under the age of 40. Most of us begin our careers with negative net worth and it takes years of saving, investing, and compounding to accumulate wealth.
Related: How I plan to be financially free by 40
This chart shows the net worth of average accumulators of wealth by age, according to the authors:
| Age | Salary | Avg. Net worth | UAW | PAW |
| 20 | $40,000 | $80,000 | $40,000 | $160,000 |
| 25 | $50,000 | $125,000 | $62,500 | $250,000 |
| 30 | $60,000 | $180,000 | $90,000 | $360,000 |
| 35 | $70,000 | $245,000 | $122,500 | $490,000 |
| 40 | $80,000 | $320,000 | $160,000 | $620,000 |
| 45 | $90,000 | $405,000 | $202,500 | $810,000 |
| 50 | $100,000 | $500,000 | $250,000 | $1,000,000 |
| 55 | $110,000 | $605,000 | $302,500 | $1,210,000 |
| 60 | $120,000 | $720,000 | $360,000 | $1,440,000 |
A decade later and my current net worth is now in-line with the “average” described in the book but nowhere close to becoming a prodigious accumulator of wealth anytime soon.
Retirement savings checkpoints
Recently I stumbled on another metric that looks at how much you should have saved up for retirement at your current age. The retirement savings guide was published by JP Morgan Asset Management and uses a model to determine how much you should have saved at certain checkpoints in your life.
For example, a 35-year-old who earns $100,000 per year should have $150,000 save up for retirement by now.
| Current age | $50,000 | $75,000 | $100,000 |
| Checkpoint x Current Salary | Checkpoint x Current Salary | Checkpoint x Current Salary | |
| 30 | 0.4 | 0.6 | 1.0 |
| 35 | 0.7 | 1.1 | 1.5 |
| 40 | 1.2 | 1.6 | 2.2 |
| 45 | 1.7 | 2.3 | 3.0 |
| 50 | 2.4 | 3.1 | 3.9 |
| 55 | 3.3 | 4.2 | 5.2 |
| 60 | 4.4 | 5.5 | 6.7 |
| 65 | 5.7 | 7.1 | 8.6 |
How to use:
- Go to the intersection of your current age and your current salary.
- Multiply your salary by the checkpoint shown to get the amount you should have saved today, assuming you continue annual contributions of 5% going forward.
- Example: for a 40-year-old making $100,000: $100,000 x 2.2 = $220,000
I’m not quite 35, and I don’t make $100,000 per year, so if I use the $75,000 column as a rough guide I should have $82,500 saved for retirement by now. My last RRSP update revealed that I had $92,500 invested in my retirement account. Interestingly, the commuted value of my defined benefit pension is about $82,900.
Related: Why I save outside of my defined benefit pension plan
Final thoughts
Stanley’s metric says that I’m an average accumulator of wealth while JP Morgan’s checkpoint says I’ve got twice as much saved for retirement as I’m supposed to at my age.
It can be fun to compare net worth and retirement savings to see where you stand, but you should take these age-based savings benchmarks with a grain of salt.
Remember that we all get out of the gate at different times and at different speeds. If you stayed in school to earn a graduate degree you might be years behind your peers and deep in debt to start your career. But with an increased earning potential you may quickly catch and surpass those in your age group. In this case it’s not about where you start but where you finish.
I think we as a society place a lot of value on these benchmarks but in reality it differs so much from person to person. When I was 25 I had a net value of around $25k – far below the average. At that time I couldn’t think of one person in my peer group who had a net worth over $30k. With people spending more and more time and money in school it just means a much later start. As you mentioned where and how you start is irrelevant, it’s all about how you finish
@Dan – I think as long as you set individual goals and keep moving the needle forward in terms of savings or net worth then you shouldn’t have to worry about some arbitrary benchmarks.
Exactly! It depends on what your plans are for retirement. Sure, if you’re willing to work until 65 or 70, then the lower numbers that JP Morgan Chase suggests may work….
I’m planning to be able to “retire” by 45, so I need to be much more aggressive!
I would be lying if I said I thought benchmarks weren’t useful. However, I agree that they are not accurate. Right now, my savings are pretty small (really they should be bigger) but I have money tied up doing things that will increase my income – and savings – in the future. The hope is that what I am doing now will set me up for the rest of my life, and that I will rapidly catch up with the benchmarks.
@Retired by 40 – That’s the thing, the power of compounding will eventually be on your side and you’ll blow these benchmarks out of the water.
“For example, a 35-year-old who earns $100,000 per year should have $150,000 save up for retirement by now.”
I understand this is just an example but I don’t know anyone in their mid 30s making that kind of money, seems like this figure should be cut in half to be more in line with the earnings of average Canadians.
@Joel – I agree, and in fact, I cut off more than half of the columns for the JP Morgan retirement savings checkpoints because they included salaries of up to $400,000 per year!
I entirely agree with you, these benchmarks are dumb. The number of assumptions in them is staggering, and it is hard to imagine more than a tiny percentage of people finding any practical use for them.
One example, suppose a guy earning 100k decides at 60 to cut back to half time at 50k. Has he instantly gone from a 6.7 multiple to a 4.4 multiple? If not, what is his checkpoint multiple? Seems to me these formulas crash on real life scenarios.
The benchmarks are dumb but they are interesting.
I prefer to focus on my savings rate, regardless of what others make or do not make. The only thing I can control when it comes to retirement (or financial freedom) are my own choices.
If I’m always looking around at what other people do, I’m not focused on what I can do. 🙂
Mark
These figures seem a little high to me. Kudos to anyone who is able to achieve these numbers… Our family is barely scraping by with two kids and a mortgage. The cost of living is exorbitant in Ontario. Even though these bench marks are just average guidelines, I am a left a little depressed after reading this article!
I think the value of this kind of benchmark is it gets people thinking but no point in panicking people or they give up. I come across families saving but carrying debt on cards or line of credits because it makes them feel good but its often hard with low returns and high MER to make the interest rate you are paying out of taxed dollars. Run a surplus, pay down debt , disaster proof your life THEN invest for the future
Life does not always work this way with income continuously moving up. So many companies are giving 1 or 2 percent raises which are offset by rising medical premiums and clawbacks. As one ages, jumping to another company in search of increased salary is not always an option. As well, investments are growing at a slower pace putting more pressure on net worth. Charts need to be viewed as interesting but many factors impact age-based savings.
I don’t think any of the so called benchmarks is meant to be an absolute, just a reference point. Think about the wide range of possible families, from a single parent with three kids and a low income to a pair of doctors with no kids. Really, the comparison we need to make is how much do I spend now, how much do I anticipate I’ll spend in retirement, and am I saving/investing enough to have that much. More means retire earlier, spend a little more extravagantly or leave lots to the estate, less means work longer, be more frugal and hope the kids don’t expect much. If every person just aimed to have enough to live a reasonable and comfortable life in retirement, we as a society would be much better off.