New Retirement Savings Guidelines

by on September 12, 2012

How much do you need to save to retire?

According to Fidelity’s latest recommendations, eight times your annual income is the right amount of money to save for your retirement.  Specifically, here is what Fidelity had to say about saving for retirement:

In the set of age-based targets released Wednesday, Fidelity says employees should have the equivalent of their annual salary in savings by age 35 in order to reach the first benchmark en route to that goal.

To stay on pace, individuals should then plan to have saved twice their salary by 40, four times’ salary by 50, five times by 55 and six times by 60.

Under that scenario, then, someone with a $60,000 salary would need to have $240,000 in savings at age 50 to be on track.

Although many will need more, especially at higher pay levels, saving eight times’ income by age 67 should provide most workers with roughly 85 percent of their pre-retirement income in retirement, according to Fidelity.

The nation’s largest 401(k) administrator is distributing the guidelines as what it calls a rule of thumb to help employees become more active in their retirement planning. Its 12 million accountholders had an average balance of about $73,000 at the end of June.

You can find the rest of this article at

So how does this compare to our previous articles about how much money you need to retire, which we posted at themoneyways?  Well, to be honest, this figure is much smaller than the figure that our retirement calculator says you need to save.

For example, Fidelity says you need to save 8 times your income, which in their example is $60,000.  That means you need to save $480,000 to retire at 65 and live to 92.  In our retirement calculator (found at bottom of page), we calculate the NPV (net present value) of the payments that you would need to support yourself during retirement.  If we assumed you would need 80% of the $60,000, or $48,000 per year to live on during retirement, and that you would be retired from 65 to 92 (27 years) and that you would earn 5.5% (same as Fidelity assumed), and that inflation was 3%, then you would need to save over $900,000 in order to create the cash flow you needed to retire.  I’m wondering why the number is so much higher, so I’m thinking that maybe it’s the inflation figure.  If I assume zero inflation, then our retirement calculator still says you need $660,000 to retire, which is much higher.

new retirment savings guidelinesI guess I’m not quite buying into Fidelity’s new guidelines.  In other words, I don’t think that is enough money to retire on.  Perhaps the difference could be explained by some other assumptions that Fidelity is making.  For example, they maybe assuming that social security will account for a portion of your income or something along those lines.  If something like that is the case, then I guess I could buy into their assumptions, but I’d have to know the rest of them.

There are also other things to consider during retirement. For example, if you are struggling to pay your bills and own your own home you may be eligible to take out a mortgage to help you. But not just any mortgage will do. In fact, a traditional home loan may cause you more financial woes. A reverse mortgage can relieve those woes by providing you with extra funds without any immediate restrictions or financial responsibilities. A reverse-mortgage application calculator can help you estimate how much a lender will give you based on your home equity. When you sign the mortgage agreement it will allow you to receive monthly income out of your home equity for a set time period. Another benefit of such a loan is that you cannot go into default for missing a payment because there will be no scheduled payments to miss. Therefore, you can be secure in the knowledge that your living situation is safe and your other assets cannot be affected.

If anything, looking at guidelines like this is a good way to think differently about your retirement savings.  In every case, you should fully understand the underlying assumptions of any rule of thumb retirement calculators, to make sure that they apply to you.

What do you think about Fidelity’s new guidelines?

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