Diversification in Investing, Gender Politics, Your Workplace, and Your Private Life: The Unexpected Consequences of Not Putting All Your Eggs in One Basket
Olegs Jemeljanovs, PhD, CFA·11 min


We are led to believe that there is a way to properly prepare for any financial disaster. But in the current (rapidly changing) economic climate, is that still true?Not too long ago I wrote about the "75k will make you happy article." Now I have set some serious question marks next to that article, but I won't dive into that here. Here, I would like to dive into an even stronger numerical plague: the amount of money you should have set aside, by age. No one wants to hear that they are 5 years behind on preparing for their retirement. Actually, most people don't want to hear about their retirement at all. But, knowing all this, there are several notable plans. One of my favourites is by Fidelity. According to them you should set aside (at least):
Fidelity also mentions investing, using the well-known (their words, not mine) 4% rule: if you have 10 times your last salary invested, you should be able to draw 40% of that last salary for the retirement of at least 30 years. Fidelity adds to that the value of your expected Social Security benefit (LOL) and the change in average spending patterns in retirement vs. pre-retirement. The latter is referring to the fact that most retirees own their houses and no longer pay mortgages and overall spend their money differently as compared to a 30-year old (fair). The former is assuming we get any benefits, which is becoming increasingly doubtful.
There are a lot of assumptions here that I'm really not too sure to apply to my generation. Let's be real here. We know we are one of the first generations that will be worse off than their parents. And that does sting. Especially as we are massively in student debt as a generation.
My advice: don't count on there being any money left from the government pot to be given to our generation when we retire (if we ever do). Don't count on being able to own a house (and as such, your spending pattern won't change as much as is assumed). Don't count on being able to save a lot during your twenties and thirties (rent over 50% of my shit wage, is that you?), nor your fourties (hello student debt my old friend). And the kids will cost money too (if you want them, of course).
Now Fidelity isn't the only one with a formula, or a guideline if you will. There is more! There is the "Millionaire Next Door Wealth Formula" brought to life by Thomas J. Stanley, PhD and William D. Danko, PhD. This one is riddled with even more assumptions, so let's hit it:
"Divide the age of the main breadwinner in your household by 10, and multiply by your household income (they say that your Adjusted Gross Income, or AGI, is a good number to use)."
They even give an example to make sure you get the actual calculation: "say John, aged 52, is married to Jane, aged 55. Say Jane’s salary is higher than John’s, and together their AGI is $90,000/year. The formula says that they should by now have $495,000 set aside for retirement (= (55/10) x $90,000)."
Clear as ice.
You're probably wondering how they came up with this formula: “The Wealth Equation was developed from national surveys of households with incomes of $80,000 or more. The typical millionaire is in his/her (let's be honest: his) late 50s. In fact, in my most recent national survey, the typical millionaire was 57. Those who are significantly younger than 57 should be aware of the fact that the Wealth Equation overstates what they should actually be worth.”
Yes, a formula based on wage and age, which overstates at certain ages, and understates at others. Unsurprisingly, riddled with loopholes and assumptions. This formula will work if:

Merle van den Akker is a PhD student in Behavioural Science, at the Warwick Business School. She studies the effect different payment methods, especially contactless and mobile methods, have on how e manage our personal finances. In her "free" time she writes articles on personal finance, behavioural science, behavioural finance and life as a PhD student, these are all published on Money on the Mind. With DDI, she writes on personal and behavioural finance, to ensure that knowledge from academia trickles into the mainsteam, and can help as many people as possible!