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Financial services giant Fidelity has a rule for retirement savings you may have heard of: Have 10 times your annual salary saved for retirement by age 67. This oft-quoted guideline can help you identify a retirement savings goal, but it doesn’t fully account for how much of those savings you’ll cover in retirement.
Enter Fidelity’s 45% rule, which states that your retirement savings should generate about 45% of your pre-tax and pre-retirement income each year, with Social Security benefits covering the rest of your savings needs. expense.
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The financial services company analyzed spending data for workers aged 50 to 65 and found that most retirees need to replace between 55% and 80% of their pre-retirement income to preserve your current lifestyle. Because retirees have lower daily expenses and don’t typically contribute to retirement accounts, their income requirements are lower than for people who are still working.
As a result, a retiree making $100,000 a year would need between $55,000 and $80,000 a year in Social Security benefits and savings withdrawals (including retirement benefits) to continue their current lifestyle.
Fidelity’s 45% guideline dictates that a retiree’s nest egg should be large enough to replace 45% of his pre-retirement, pre-tax income each year. Following this rule, the same retiree making $100,000 a year would need enough savings to spend $45,000 a year, in addition to his Social Security benefits, to finance her lifestyle. Assuming the person lives another 25 years after reaching retirement age, this person would need $1.125 million in savings.
Pre-retirement income plays an important role
But all retirement spending plans are not created equal. Those who have earned less money during their careers will have less savings than higher income earners and, as a result, will have to replace a greater percentage of their pre-retirement income.
“Your salary plays a big role in determining what percentage of your income you’ll need to replace in retirement,” Fidelity wrote in its most recent views. “People with higher incomes tend to spend a small fraction of their income during their working years, and that means a lower income replacement target by percentage to maintain their retirement lifestyle.”
According to Fidelity, a person earning $50,000 a year would need savings and Social Security to replace about 80 percent of their income in retirement. An individual making $200,000, however, could get by in retirement by replacing just 60%.
Social Security plays a less significant role in the retirement plans of higher income earners. Consider the table below:
Income Replacement Using Fidelity’s 45% Rule Pre-Retirement Income Replacement Rate from Savings Replacement Rate from Social Security Total Replacement Rate $50,000 45% 35% 80% $100,000 45% 27% 72% $200,000 45% 16% 61% $300,000 44% 11% 55%
According to Fidelity, a retiree making $50,000 a year would receive 35% of that income via Social Security. But a high-income individual making $300,000 a year would see only 11% of his income replaced by Social Security benefits. While higher-income individuals don’t need to replace much of their pre-retirement income, retirement savings play a bigger role for these types of retirees.
Bottom line
Fidelity’s 10x rule of thumb is an elegant guideline to follow as you save for retirement over many decades. But when retirement comes around, Fidelity recommends that your savings cover 45% of your income needs, with Social Security covering the rest. As a result, the average retiree will need to replace between 55% and 80% of their pre-retirement, pre-tax income to maintain their current lifestyle.
Retirement planning tips
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A financial advisor can be an invaluable resource when it comes to retirement planning. Whether it’s saving in tax-advantaged accounts or mapping out your income needs, a counselor can help you with your retirement planning needs.
Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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Although people can start collecting Social Security benefits at age 62, delaying collection will result in higher benefits. SmartAsset’s Social Security Calculator can help you develop a collection plan that allows you to maximize your benefits and enjoy retirement.
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The post Should The 45% Rule Guide Your Retirement Strategy? first appeared on the SmartAsset Blog.
