All Models Are WrongGeorge Box wrote, “All models are wrong, but some are useful.” Models will not capture all the factors and complexity of real life and they don’t need to. In my first draft of this piece I went on about building simulations and trying to anchor my models with established norms. That didn’t pass Jenn’s nerd filter. We can take up that discussion in the comments if anyone is so inclined. For now, I’ll just state some rules of thumb to see where they go. You can find similar rules of thumb here or here or here.
Rule 1: Save 8-10% of your incomeHistorically, people have saved 8.36% of their income but the current is 5.30 (link). Many companies match 401K contributions (which is free, easy money folks) with a myriad of schemes that has a net contribution of 8-10% (although some employers now use matching 401k in place of traditional pension plans so you might need a higher pay multiplier, but let’s keep this easy). On the subject of simplification, I am not going to consider the difference between pre-tax and post-tax dollars or percentage of net pay vs take home pay. I feel pretty good about that 8-10% number.
Rule 2: You’ll need 8-12 times your final salary to retireThis is a massive simplification. It accounts for inflation and expected lifespan after retirement. Perhaps most importantly, it accounts for your growing standard of living. People are like goldfish in a bowl. Their needs grow to fill whatever bowl they are placed in. As the wise Eddie Vedder wrote is his song Society:
When you want more than you haveYou think you need And when you think more than you want Your thoughts begin to bleed I think I need to find a bigger place ‘cos when you have more than you think You need more space