Time for another retirement rule of thumb… According to Fidelity investments, you should have saved 8x your annual (final) salary by the time you reach age 67 if you want to replace 85% of your pre-retirement income in retirement.
To stay on track for this, you should have saved 1x your income by age 35, 3x your income by age 45, and 5x by age 55. They do acknowledge that “every individual’s situation will differ greatly based on desired lifestyle in retirement,” but still…
In my view, this is just another in a long line of bogus (imho) guidelines that feed into the fallacy that retirement planning should be based on pre-retirement income levels. I’ve said it before and I’ll say it again:
Retirement savings goals should be based on expenses, not income.
If you’re living paycheck-to-paycheck, then income might be a decent proxy for expenses. But I’m hoping that’s not the case for most of you.
There are also a number of underlying assumptions here. Among them:
- Employee starts work (and 401(k) contributions) at age 25, continues to age 67.
- 401(k) contributions start at 6% of income, increasing 1%/year, topping out at 12%.
- Average annual portfolio growth of 5.5%.
- Social Security is included in the 85% replacement.
- Income increase 1.5%/year over the inflation rate.
- No breaks in employment, earnings, or savings.
In the end, if rules like this spur someone to action (vs. complete inaction) by at least providing a concrete and/or conceivable (if wildly inaccurate) goal, then I guess they’re doing their job.
But you’re not doing yourself any favors (again, imho) by burying your head in the sand and basing your retirement plan on overly-simplistic assumptions.
Here’s a simple rule of thumb: Project your retirement income needs and multiply by 25 (or 33 if you want to be conservative). These values correspond to 4% and 3% withdrawal rates, respectively. That’s how much you’ll need in a well-diversified portfolio.
Is that number overwhelmingly large? Then you need to start earning more, investing more of what you take home, and/or reducing your desired standard of living. Or all three. You can’t cheat reality.