How Much Do You Need to Retire?

Challenging Fidelity’s Retirement Guidelines

Fidelity Investments is a powerhouse when it comes to retirement planning and advice. They also know the importance of explaining concepts to people in easy-to-understand terms. I have seen see a lot of their advice recently, most likely because I’m approaching retirement age. I’m rather good with numbers, so I figured I’d take a closer look at their advice. This is what I found.

Retirement Goals by Age

Having retirement savings goals at a variety of ages is a good concept. For anyone just entering the workforce, or even mid-career, it is nice to have a series of milestones to supplement a final retirement age target. Retirement planning is not a set-and-forget process. Everyone needs check-in points just in case an adjustment is needed to their plan. Fidelity does this and provides the following guidance in terms of how much retirement funds you should have saved:

  • Age 30 = 1x Annual Salary, Age 35 = 2x Annual Salary, Age 40= 3x Annual Salary, Age 45 = 4x Annual Salary, Age 50 = 6x Annual Salary, Age 55 = 7x Annual Salary, Age 60 = 8x Annual Salary, and Age 67 = 10x Annual Salary

Hopefully, someone at Fidelity eventually spots a typo I see on their website that recommends saving “x” your starting salary. That’s not true, the “x” refers to your current annual salary. Suggesting a 25-year-old making $50,000 per year needs to save $500,000 by age 67 is misleading.

Retirement Planning Assumptions

Let’s take a closer look at how they produced these numbers. In the footnotes, Fidelity gives us the following assumptions:

  • A 15% savings rate, a 1.5% constant real wage growth, a retirement age of 67 and a planning age through 93

In the United States, full retirement is considered age 67 and planning through age 93 is very reasonable. Based on some long-term inflation values, the 1.5% real growth translates into an average annual increase of around 5.1%. Given the possibility of promotions throughout someone’s career in addition to cost-of-living increases, this assumption passes the sniff test too.

They also tell us their targets assume a person will save 15% of their income annually, starting at age 25 and more than 50% of their savings are invested in stocks. Finally, they also state the person retires at age 67 and plans to maintain their pre-retirement lifestyle. Retiring at age 67 gives you full Social Security benefits. So, if you plan to retire at age 65, they recommend a 12x salary multiplier, and if you plan to retire at age 70, you can reduce that multiplier to 8x.

Fidelity assumes these retirement funds replace 45% of income. This value is a lot lower than the 80% quoted by many professionals. Fidelity also goes on to state that if you’re okay with a lower standard of living, the salary multiplier can be 8x and if you want a higher standard of living in retirement, shoot for a 12x salary multiplier. Admittedly, this is confusing since these multipliers are the same as the “early and late” Social Security multipliers.

Crunching the Numbers

Since we know the salary growth rate is 5.1% and the savings rate recommendation is 15%, we can calculate a return on investment (ROI) that allows us to hit the retirement savings targets. In this case, a ROI of 7.4% allows us to hit all the savings targets given these two assumptions. I also plotted Fidelity’s recommendations to see what their simplified ratios looked like on a graph.

Age versus Salary Multiplier

We see from this plot the line isn’t exactly straight (as expected), but the R squared value of a fitted line is very good. This being the case, I extended the line to age 25 so we could predict the savings ratio at any age. The below plot shows the equation for that line.

Simplified Age Versus Salary Multiplier

As you can see, the equation for each of the above lines is very similar, which tells me a simplified version of Fidelity’s targets will work well.

Retirement Ratio Calculator

If you’re not at one of the milestone ages, it’s difficult to figure out the exact course of action you may need to hit your retirement savings targets. Since this website is dedicated to producing online calculators, we’re going to provide one below that you can use to crunch through all the various scenarios you want to evaluate.

If you want to learn more about this calculator, we have an article dedicated to the use of our Retirement Guidance Calculator. Using your age, current salary, anticipated annual raise, contribution rate, retirement fund balance, and estimated return on investment, the calculator provides your current and target salary ratio (or multiplier), savings, terminal savings (age 67), future salary multiplier, terminal salary, and replacement salary in retirement using the rule of 4%.

Fidelity Guidance and the Rule of Four Percent

It has been statistically demonstrated that using a 4% withdrawal rate in retirement provides protection against running out of funds in retirement, which is something many retirees fear. Since Fidelity’s guidance is to have ten times your salary in retirement savings, we also know this will replace 40% of your pre-retirement income. This is surprisingly low, given the common rule of thumb that you will need to replace 70 – 80% of your income when retired.

Summarizing Fidelity’s note on this topic:

Fidelity’s pre-tax savings goal of 15% of annual income is based on our research… to support a replacement income rate of 45% of preretirement annual income through age 93. The target is based on Consumer Expenditure Survey (BLS), Statistics of Income Tax Stats, IRS tax brackets, and Social Security Benefit Calculators. The 45% income replacement target (excluding Social Security) from retirement savings was found to be consistent across a salary range of $50,000-$300,000; therefore, the savings rate suggestions may have limited applicability if your income is outside that range.

Since Fidelity says that 10x provides 45% replacement, this means their target requires a withdrawal rate of 4.5% per year. Using our portfolio withdrawal success calculator, we see there is a very high chance (greater than 95%) of success using this approach. Fidelity also acknowledges Social Security as a source of income but excludes it from their 45% income replacement target.

Let’s assess the reasonableness of this 45% target. We know Fidelity expects people to save at least 15% of their salary (ignoring employer match) so they know those same individuals only need a maximum of 85% of their salary in retirement. Said another way, the 45% target effectively becomes around a 60% replacement target. Fidelity also excludes Social Security, which can close a ten to fifteen percent gap, raising the total retirement income level right at the 65 to 70% mark.

What did we Learn?

If you believe Social Security will still be available to you in retirement, the 10x salary multiplier guidance from Fidelity means you’ll have 45% of your pre-retirement salary in retirement. You’re already directing 15% to your retirement fund, which is something you don’t need to do in retirement. Running the numbers, 45% / 85% (100%-15%), is equal to 52%. Adding 10 to 15% for Social Security gets you to 62 to 67% replaced.

If that sounds low to you (it does to me), then we know each 1x multiplier increase translates into 4.5% of additional replacement income. Meaning a 12x salary multiplier will replace 4.5% x 12, or 54% of your annual salary, which gets us much closer to the 70 to 80% guidance we often read about.

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