FREE NEWSLETTER

Path to Retirement

Kenyon Sayler

SOME FRIENDS WERE recently discussing their investment performance. I couldn’t contribute to the conversation—because I have no idea what our investment returns have been.

The fact is, I don’t find performance information all that valuable, plus it’s relatively hard to calculate since you have to account for both price changes and dividend or interest payments. To be sure, investment returns are useful if you’re looking to determine whether a mutual fund manager is adding returns in excess of a benchmark index, also known as generating alpha. But since I invest mainly in index mutual funds and exchange-traded index funds, I’m not expecting to achieve any alpha.

Moreover, folks don’t spend investment returns. Instead, what they spend are dollars. I can have terrific returns, but if I don’t have much invested, it won’t amount to much.

So how do I track our financial progress? Every year, I calculate the net worth—all financial accounts minus all debt—for my wife and me. I then take that figure, and look at measures that assess net worth or total savings as a multiple of your salary. Different financial firms have slightly different guidelines.

For instance, as you can see from the accompanying chart, T. Rowe Price says that 45-year-olds should have financial assets that are two to four times their annual salary. Savings benchmarks are also available from Fidelity Investments and in Charles Farrell’s book Your Money Ratios.

The idea behind these measures: Your net worth or total savings should hit the various age milestones—and, if it does, you’re on track to retire in comfort in your 60s. HumbleDollar’s Two-Minute Checkup uses a similar methodology to assess a user’s “financial fitness.” Even though I have no idea what our investment returns have been, I can track our net worth as a multiple of our salaries, and that tells me we’re in good shape for retirement.

As it happens, fluctuations in our net worth these days often closely mirror fluctuations in the S&P 500. But it hasn’t always been that way. For instance, in three out of five years in the late 1980s, our net worth went up at least twice as much as the S&P 500’s return. While I’d like to claim these results were driven by my investment savvy, the truth is that we were young and had few assets. The amount we contributed every year to our 401(k)s and IRAs represented significant additions to our net worth. Those contributions, plus our investment returns, turbo-charged the increase in our net worth.

At times, we’ve also significantly underperformed the S&P 500. In 2018, we had losses that were twice as large as those of the S&P 500. When the market recovered in 2019, we pocketed half the market’s gain.

What led to such significant underperformance? Part of my compensation took the form of stock options. Since options are only worth exercising when the share price is above the strike price, their value can be highly volatile—and both 2018 and 2019 were rough years for my stock options. On top of that, our portfolio includes a significant stake in foreign stocks and it has a value tilt. Both trailed the S&P 500 over the past decade. Still, thanks to the chart, I knew we were still on track for retirement.

Browse Articles

Subscribe
Notify of
29 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments
Andrew Lindeman
1 year ago

I find it interesting that these “xX multiple against salary” never adjust for Roth accounts. Not a difficult adjustment to make, but none of these articles I have seen anywhere mention it.

My retirement funds are 40% roth.

Jonathan Clements
Admin
1 year ago

Having lots of money in Roth accounts obviously makes a difference. But these income multiples are intended to be simple rules of thumb — and I think they’re super-helpful. How likely is the typical American to even consider them if there’s a need to adjust for different account types?

Last edited 1 year ago by Jonathan Clements
Patrick Brennan
1 year ago

What has helped ease me into retirement, besides the pandemic killing all my in person work, was the fact that my 4 kids all went off the payroll, paid off my mortgage, and have far fewer expenses. From 2008-2020 I had at least one child in college but often 2, I owned 6 cars, paid over $800 a month for car insurance, etc. Thankfully, all my kids are self sufficient and my expenses went down so much I could see a clear runway ahead without having to work.

Last edited 1 year ago by Patrick Brennan
Mark Gardner
1 year ago

Great article! I completely resonate with the insights shared.

While I’ve experimented with online portfolio trackers before, I’ve come to the realization that they don’t align with the strategic approach I’ve taken in building a liability matching portfolio for my retirement. Consequently, I’ve shifted to tracking my risk portfolio returns using a simple spreadsheet. Here’s why:

1. Strategic Bucketing: I’ve categorized my portfolio based on distinct life purposes such as a donor-advised fund and legacy, each with its unique blend of stocks, bonds, regional allocations, and factor weights. For instance, my legacy portfolio for my youngest is exclusively equities with a bias towards small-cap value.

2. Curiosity-Driven Analysis: I’m driven by academic curiosity when it comes to monitoring tracking errors within my index portfolio mix and gauging my reactions to them. This approach helps me refine and optimize my investment strategies over time.

3. Disciplined Decision-Making: Documenting my investment decisions in a policy document serves as a powerful tool to resist the temptation of unnecessary trading. This structured approach helps maintain discipline and ensures that my investment moves are aligned with my long-term goals.

In essence, this hands-on and strategic approach to portfolio tracking is helping me far more effective and tailored to my financial objectives.

Kenneth Tobin
1 year ago

use big charts.com to compare your returns to different indices

mytimetotravel
1 year ago

Vanguard tells me my investment returns over a number of different periods and for all or a portion of my investments. I can’t say I look at the number very often but it’s there if I want it.

I have always held that what matters is your expenditure, not your income, when looking at your retirement needs. Plus a healthy allowance for future medical care.

Chris James Ignash
1 year ago
Reply to  mytimetotravel

Look at the 10-year return at Vanguard’s website. The returns are 13-16%. After destroying my portfolio in 2000-2010, trading frequently and chasing performance, I have had my $$ in just 4 Vanguard US fund indices – VSIAX, VFIAX, VVIAX, VSMAX – 25% in each.

Michael1
1 year ago
Reply to  mytimetotravel

Kathy, I agree with this statement Re expenditure v income when looking at retirement needs. Dick, I know you find estimating future expenses in retirement nearly impossible, but it’s a worthy undertaking, and essential if you expect to change your life in retirement. 

Two years into our retirement but with a hopefully long time horizon, looking at our portfolio or net worth in terms of multiples of salary is meaningless. Estimating future expenses is everything. An inexact science to be sure, but it needs to be done. 

If one retires later, and stays in the same place, with a similar lifestyle except for not going to work, multiples of salary may be enough (I’d say not, but maybe). But if you retire earlier and/or have location and lifestyle changes in mind, better to spend some time on some research and math, imprecise though it may be.

R Quinn
1 year ago
Reply to  Michael1

I would agree, a significant change in lifestyle may well change spending, but I suspect for most people such change is designed to lower expenses, rather than increase.

If you retire early – before age 62 at least, your longevity risk goes up as does your exposure to inflation and stock market changes.

I think in either case the realistic measure and goal is to retire with full gross income replacement from all sources. Over time you are likely to just stay even or have built in a cushion for hard times.

Please note I make a distinction between setting and living to a budget and tracking and knowing expenses. Just from repetition I know all my monthly expenses and what is left at the end of the month. And because some of my income each month goes into an emergency account and a discretionary spending account there are not – so far 15 years retired – instances of expense shock. I am sure I couldn’t do that if I retired with 70-80% income replacement.

Michael1
1 year ago
Reply to  R Quinn

I’d agree with most of that. In our case, we planned for our expenses to go up. (They haven’t yet, but they will.) We don’t have guaranteed income to cover it, but we do have a portfolio. So while we haven’t done so, we could replace X% of preretirement income, or expenses plus Y%. In any case, some estimation, assumptions and math are required.

mytimetotravel
1 year ago
Reply to  R Quinn

You seem to assume that people spend all their income. I was able to retire early on considerably less than my income, as I have previously explained, because I lived well below it. Just as with RMDs, the fact that money is coming in doesn’t mean it needs to go out.

R Quinn
1 year ago
Reply to  mytimetotravel

You can usually adjust spending even if unpleasant, but adjusting income in retirement may not be so easy. Expenditures are limited by income so having an income above ongoing expenditures seems highly desirable – for things like unpredictable medical care.

mytimetotravel
1 year ago
Reply to  R Quinn

Planning for an income above expenditures requires an estimate of expenditures, best based on current expenditures minus/plus expected changes.

Edmund Marsh
1 year ago

Clear thinking. When we make a big purchase, we want to know the “bottom line.” The bottom line to buy our retirement is our net worth, plus the add ons that Jonathan references. Kind of simple, but sometimes overlooked. The “Tipping Point” article that’s linked is one of my favorite from Jonathan.

R Quinn
1 year ago
Reply to  Edmund Marsh

Do you really mean net worth or the valuable of spendable investments. My net worth is 20% made up of my houses which I don’t consider spendable.

Edmund Marsh
1 year ago
Reply to  R Quinn

Good point. Yes, I was thinking of income from savings. Still, for some, that might include a home at some juncture. For others, they’ll have enough without the need to sell property or look to a reverse mortgage.

Jonathan Clements
Admin
1 year ago
Reply to  Edmund Marsh

Thanks for the kind words, Ed. Here’s a direct link to the “tipping point” article:

https://humbledollar.com/2018/03/the-tipping-point/

M Plate
1 year ago

I tend to disagree with any formula that specifies saving up multiples of your annual working salary. You need to save up multiples of your annual expenses in life. Savings plus SS and other sources of income have to cover what it costs you to live(well), not necessarily what you used to earn when you were working.
An 80,000-dollar salary doesn’t go that far for a head of household with a mortgage, 3 kids, a student loan, a dog, and status symbol car.
The same 80,000-dollar salary is more than enough for a retiree who has no debt, a used cat, and a Ford.

Last edited 1 year ago by M Plate
Edwin Belen
1 year ago
Reply to  M Plate

M Plate, I agree with you. Before I tracked anything and I only started in my late 40’s, I didn’t really know what I made. I figured that I spent less than I earned but not by much with the kids. Once the kids left and I paid off the mortgage, I started focusing on finances. I realized I didn’t need much and took a job making 1/3 of what I used to make and told my wife to retire at 50. Fingers crossed, our investments will continue to grow and the bit of extra savings every years helps pad our future. Not to mention two pensions I earned that should cover most of our living expenses. If I looked at my earnings, net worth as a percentage is more of a brag than anything.

R Quinn
1 year ago
Reply to  M Plate

I tend to disagree. The top measure of income is easy to know and whether working or retired determines what’s available to spend thus limiting expenses. Trying to determine and project expenses during retirement is nearly impossible in my view. Some percentage of working income is a good target in retirement. I favor 100% but no matter what it is, better to have an excess reserve than trying to predict every future expense for the next 30 years.

Last edited 1 year ago by R Quinn
M Plate
1 year ago
Reply to  R Quinn

I agree that we always need to have savings in excess of predicted expenses.
Depending on individual circumstances, trying to replace 100% of one’s pre-retirement income could be excessive. After my mortgage was paid off, I was comfortably living off half my salary. No doubt it is always safer to have more savings and more income. Safest way is to work until the day we can’t.

R Quinn
1 year ago
Reply to  M Plate

Yes, in some cases it could be construed as excessive. If a person was to retire say January 1 and paid off a mortgage in December, then excess money if freed up, but if the mortgage was paid five years before, I suspect the standard of living and spend has already adjusted.

Then there is inflation. Since I retired my pension spending power has eroded by over 40%. My spending in retirement never decreased, changed how we spend, but did not decrease. Much is discretionary, but isn’t that the kind of retirement most people want?

Before I retired I was paying $197 a month for health care for two. Now with Medicare, Medigap premiums plus IRMAA premiums are over $1,000 a month each.

Nate Allen
1 year ago
Reply to  M Plate

Why did the dog become a used cat at retirement?

Inquiring minds want to know!

/s

M Plate
1 year ago
Reply to  Nate Allen

Cats are cheaper than dogs. I mean that expense wise, not implying that cats are cheapskates. And usually, a used cat is cheaper than a new one 😉

Nate Allen
1 year ago

Assuming a 4% withdrawal rate, wouldn’t one want assets of 25 times their annual salary (or at least their annual withdrawal needs) at retirement age? (Or 28.5 times for a 3.5% withdrawal, 33.3 for 3%, etc.) This would obviously be minus Social Security or any pension of course. However, 10x salary (Fidelity’s recommendation) seems a little light for most situations.

Jonathan Clements
Admin
1 year ago
Reply to  Nate Allen

If the goal is to use investments to replicate half of your final salary — assuming Social Security will give you the rest of what you need to fund retirement — then a nest egg equal to 12.5 times salary should suffice, assuming a 4% withdrawal rate. Obviously, the right figure will depend on your individual circumstances (any pension, how much of your salary will be replaced by Social Security, whether you’ll downsize, etc.), but 12.5 or so strikes me as a reasonable benchmark.

Nate Allen
1 year ago

Makes sense. I had not considered how large Social Security payments are. In my mind, I generally think “Oh, I need to cover the entire amount” when creating savings plans. Given the decades until I retire, I’m not sure SS will still be paying at the same amount it is today. (Lower payments and/or higher retirement age will likely be needed for sustainability.)

R Quinn
1 year ago
Reply to  Nate Allen

Big variable for income. Earn $125,000 at full retirement age and SS provides about 27% income replacement + plus spouses benefit if applicable.

R Quinn
1 year ago

I keep it simple as well. Since I consolidated all investments with Fidelity I can look at one number and see my total investment value each day – yeah, I look, it’s an obsession.

I could also see net worth as I entered the value of houses in another section. It seems to me though that what matters most when it comes to retirement planning is not net worth, but investments to actually be used for income – either selling or dividends and interest.

I also measure myself against benchmarks, but just out of curiosity and perhaps ego as that really doesn’t mean much in a practical way.

Free Newsletter

SHARE