Should You Really Use It as Your Guide to Retirement Savings?

Among the retirement rules of thumb, the most important is saving 10 times your salary by age 67.  But there must be another way for workers: to plan for their savings to provide 45% of their pre-tax and pre-retirement income.

Among the retirement rules of thumb, the most important is saving 10 times your salary by age 67. But there must be another way for workers: to plan for their savings to provide 45% of their pre-tax and pre-retirement income.

Financial services giant Fidelity has a retirement savings rule you may have heard of: By age 67, save 10 times your annual salary for retirement. This oft-quoted guide can help you determine your goal for retirement savings, but it doesn’t fully account for how much of those savings will cover retirement age.

Enter the 45% Fidelity rule, which says your retirement savings should generate about 45% of your pre-tax income before retirement each year, with Social Security benefits covering the rest of your spending needs.

A financial advisor can analyze your income needs and help you plan for your retirement. Find a consultant today.

A financial services firm analyzed spending data from working people aged 50 to 65 and found that most retirees need to replace 55% to 80% of their pre-retirement income to maintain their current lifestyle. Because retirees have lower day-to-day expenses and usually don’t contribute to retirement accounts, their income requirements are lower than those of people who are still working.

As a result, a retiree who made $100,000 a year will need $55,000 to $80,000 a year in Social Security benefits and savings withdrawals (including retirement benefits) to continue their current lifestyle.

Fidelity’s 45% guidance dictates that a retiree’s savings must be large enough to replace 45% of their pre-retirement pre-tax income each year. Following this rule, the same retiree who made $100,000 a year would need enough savings to spend $45,000 a year on top of his Social Security benefits to fund his lifestyle. Assuming a person lives another 25 years past retirement age, they would need $1.125 million in savings.

Pre-retirement income plays an important role

Among the retirement rules of thumb, the most important is saving 10 times your salary by age 67.  But there must be another way for workers: to plan for their savings to provide 45% of their pre-tax and pre-retirement income.

Among the retirement rules of thumb, the most important is saving 10 times your salary by age 67. But there must be another way for workers: to plan for their savings to provide 45% of their pre-tax and pre-retirement income.

But all retirement spending plans are not the same. Those who have made less money during their careers will have fewer savings than high earners and will need to recoup more of their pre-retirement income as a result.

“Your salary plays a big role in determining what percentage of your income you will need to recoup after retirement,” Fidelity writes in its latest points of view. “People with higher incomes tend to spend a small portion of their income during their working years, and this means a lower percentage income replacement goal to maintain their lifestyle in retirement.”

According to Fidelity, a person who earns $50,000 a year will need savings and Social Security to replace roughly 80% of their retirement income. However, a person making $200,000 could retire replacing just 60%.

Social Security plays a less important role in the pension plans of highly paid workers. Consider the table below:

Income replacement using the 45% Fidelity Savings pre-retirement income replacement rate Social Security replacement rate Gross 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 earning $50,000 a year will receive 35% of that income through Social Security. But a highly paid person making $300,000 a year would only replace 11% of their income with Social Security benefits. While people with higher incomes do not need to replace most of their pre-retirement income, retirement savings play a more important role for these retirees.

bottom line

Among the retirement rules of thumb, the most important is saving 10 times your salary by age 67.  But workers need to have another way of calculating: plan for their savings to provide 45% of their pre-tax income until retirement.

Among the retirement rules of thumb, the most important is saving 10 times your salary by age 67. But workers need to have another way of calculating: plan for their savings to provide 45% of their pre-tax income until retirement.

The Fidelity rule of thumb of “10 times more” is great advice to follow as you save for decades to come. But when retirement rolls around, Fidelity recommends that your savings cover 45% of your income needs, and Social Security covers the rest. As a result, the average retiree will need to replace between 55% and 80% of their pre-retirement income before taxes in order to maintain their current lifestyle.

Retirement Planning Tips

  • A financial advisor can be an invaluable resource when it comes to planning for retirement. Whether it’s saving in tax-advantage accounts or determining your income needs, a consultant can help you with your retirement planning needs.

    Finding a qualified financial advisor is not difficult. The free SmartAsset tool matches you with up to three financial advisors who serve your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find a consultant to help you reach your financial goals, start now.

  • While people can start receiving Social Security benefits at age 62, delaying collection will result in higher benefits. The SmartAsset Social Security Calculator can help you develop a collection plan that will allow you to maximize your benefits and enjoy your retirement.

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