Retirement is not a destination but a journey—the accumulation of many steps over many years. Along the way, there are myriad opportunities to get off the path—and back on it. And at virtually any turn in the road, there are possibilities to speed up or slow down your progress.
Here we offer 12 rules of the road to help guide you toward a financially secure retirement. They are not meant to be rigid one-size-fits-all rubrics, but guideposts that can help you stay on track toward achieving your long-term goals.
1. Aim to save 10%–15% or more of your income each year, including any company match. If you can’t afford that much immediately, try stepping it up as quickly as possible, say 1% a year until you hit that target. Make sure to get any company match. That’s like “free” money! And beware of loans from 401(k) plans or early withdrawals, particularly when changing jobs. Even small withdrawals can trigger taxes and penalties and undermine your ability to grow your savings. Use a Fidelity planning tool to estimate your retirement savings goal.
Read Viewpoints: Take our 1% challenge
2. Don’t be too risk averse. If you have 20 or more years until retirement, you have plenty of time to ride out the inevitable ups and downs of the stock market. So, it may make sense to consider investing a larger portion of your portfolio in stocks, which historically have produced higher long-term growth than bonds and cash. As you approach retirement, consider dialing back the stock allocation in your portfolio—but not eliminating it. Remember that you may have 30-plus years in retirement, so you’ll probably need to keep growing your portfolio. If you don’t have the time for or interest in managing that process yourself, consider a target-date fund or a managed account, which typically adjusts your asset mix for you over time.
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3. Be mindful of taxes and expenses. When saving for retirement, it’s usually beneficial to maximize the use of tax-advantaged accounts like traditional and Roth IRAs, 401(k)s, health savings accounts (HSAs), or—when contributions to qualified accounts have been maxed out—a deferred annuity. Also, keep an eye on trading and other investment expenses, which can erode returns. Make sure you are getting good value from your investment providers.
4. Location matters. It’s as true in investing as it is in real estate. In addition to maxing out contributions to tax-advantaged savings accounts and building an age-appropriate asset allocation, you may want to consider putting your less tax efficient assets—like bonds, where interest is taxed at ordinary income rates—in tax-deferred or tax-free accounts. Then consider putting more tax efficient assets—like growth stocks held a year or longer, with any price appreciation being taxable at lower long-term capital gains rates—in taxable accounts. Careful planning is key. Be sure to consult with a tax adviser when making decisions about your tax strategy.
Read Viewpoints: Tax-smart asset location
5. As a starting point, plan on needing 85% of your preretirement, after-tax income in retirement. Of course, you may need more or less than 85%, depending on your personal situation. While some costs—like work-related ones, and taxes—may decline in retirement, you may spend more on health care, travel, and entertainment. And your income level may also affect what you need: Typically, the retirement spending of higher-income groups represents proportionally less of their preretirement income than that of lower income groups. As you near retirement, make a detailed retirement budget, and use Fidelity’s Retirement Quick Check or Fidelity’s Income Strategy Evaluator to help you plan how to cover those costs.
Read Viewpoints: What will you spend in retirement?
6. Aim to accumulate at least 8X (eight times) your ending salary before you retire. That’s a rule of thumb based on a variety of assumptions,1 including market returns, savings behavior, and salary growth. If you are less diligent about saving, have lower returns, or retire earlier you may need to save more.
Read Viewpoints: How much do you need?
7. Plan for success. No one knows what the markets will do. But for planning purposes, it’s wise to be prepared for adverse market conditions. We recommend constructing a financial plan that can be successful even if investment returns are significantly below average (a 90% chance of success). That way your plan should be able to withstand even an extended period of poor returns. If the market performs better, you may have saved even more than you need, but that’s a much better “problem” to have than running out of money. Also, remember to revisit your plan at least once a year.
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8. Guard against inflation. We don’t expect a return of double-digit inflation, but even modest increases in the cost of living can erode the purchasing power of your portfolio. Our current long-term inflation outlook is around 2 %—a lower rate than historical averages because of the Federal Reserve’s explicit 2% inflation target and its perceived success in controlling inflation over the past three decades. So, consider building some inflation protection into your portfolio, with investments that can outrun inflation, like stocks, real estate, and commodities, as well as inflation-protected bonds.
9. Plan on covering essential expenses in retirement with guaranteed income like Social Security, pensions, and annuities. That will give you the security and peace of mind to invest the rest of your money for long-term growth, which you may need, given how long people are living. But don’t annuitize more than 50% of your savings. You always want some flexibility and access to your money. Also, keep in mind that guarantees are subject to the claims paying ability of the issuing insurance company.
Read Viewpoints: Strategies for retirement income
10. Be careful not to withdraw too much too fast. As a rule of thumb, we suggest holding withdrawals to no more than 4% to 5% a year over the course of an average retirement horizon. But remember, your particular withdrawal rate will likely depend on a variety of factors, including your asset allocation, your anticipated lifespan, and market performance.
A rate that is risky and ill-advised for one investor may be perfectly appropriate for another. Use a Fidelity planning tool to estimate how long your savings may last.
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11. Stick with your plan. The S&P 500 returned an annualized 8.21% for the 20 years through 2012, while the average investor in U.S. stock mutual funds achieved an annualized return of just 4.25%, according to DALBAR Inc.’s “Quantitative Analysis of Investor Behavior 2013.”2 A main reason: investors’ tendency to jump in and out of investments--often at just the wrong time--in an ill-advised attempt to catch rises and avoid market downturns. Being disciplined as an investor isn’t always easy, but over time it has demonstrated the ability to generate wealth, while market timing has proven costly for many. Instead, build a plan with an appropriate asset mix, and rebalance on an ongoing basis.
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12. Take action if you’re behind. In a recent survey of more than 2,200 households, Fidelity found that more than half of respondents were at risk of not meeting their estimated retirement income goals, but all could improve their retirement preparedness by making some important adjustments to their finances. For young people, saving more and having enough equities for growth potential were the most powerful steps. For older people, delaying retirement and working part time improved retirement readiness. Other steps to consider include tapping home equity or annuitizing a portion of your savings and investing the rest for growth potential. The main point is that you can improve retirement preparedness—if you take action.
Read Viewpoints: Rev up your retirement readiness