Over the years of writing about retirement here at the Dough Roller, I’ve covered a number of studies about retirement savings. There’s the book, Your Money Ratios, which posits that you need 12 times your annual salary by 65 to retire comfortably. And then there was a study by Money Magazine that basically reached the same conclusion.
Now Fidelity has come out with its own study. There are two aspects of the study that are of interest.
Retirement Savings Should Equal 8x Salary
The first is that Fidelity concludes that you need eight times your salary to meet basic retirement needs. That’s the lowest amount of retirement savings I’ve seen in any study.
The theory behind the study is that you’ll need to replace 85% of your salary in retirement. According to Fidelity, have 8x your salary stashed away will be enough to cover this need. I doubt it.
Assume you make $100,000 a year at retirement and have $800,000 saved. To generate $85,000 a year in income during retirement, you’d need to withdrawal over 10% of your savings. There’s simply no way your retirement savings will last through retirement at that rate of withdrawal. Most experts say you should limit what you take from retirement to about 4% a year.
Are you on Track to Retire
The second interesting aspect of the guide is that it gives you milestones to achieve throughout your working years. According to the guide, you should have saved:
- 1 times their salary at age 35;
- 3 times at age 45; and
- 5 times at age 55.
Of course, the above benchmarks assume an 8x salary goal for retirement. If you think 12x is more realistic, you can find benchmarks for that methodology in my article on Are you saving enough to retire
Income vs. Expenses
As a final thought on the Fidelity study, one needs to ask whether retirement savings should be based on your income or the expenses you’ll have in retirement. For some there may not be much difference. But for many I think there will be.
Estimating expenses during retirement can be tricky. It’s easy to assume you won’t have a mortgage or be paying to raise children, but one shouldn’t forget the cost of health care. But if you are comfortable estimating your retirement expenses, check out my formula on how much you’ll need to retire.
Finally, if you have checked out the review of Personal Capital, you should. It’s a free service similar to Mint, but it focuses on investment tracking. It’s the best I’ve seen.