The math of retirement savings

Four key guidelines to help you know where you stand on your retirement journey.

  • Living in Retirement
  • Annuities
  • Asset Allocation Funds
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

Everyone’s road to retirement is personal, with twists and turns that are unique to their situation. Yet most of us grapple with the same, sometimes elusive, questions, usually starting with “how much?”. Of course, no one knows the precise answers to these questions because you don’t know what life—or the markets—will bring. Still, you need to know where you stand to make decisions along the way that will help you have choices as retirement nears.

four key metrics"Our guideposts can help you take the wheel, and have greater confidence, no matter what surprises the markets or life deliver,” says Ken Hevert, senior vice president of retirement at Fidelity.

Our guideposts or “retirement math” may help you stay on track for your retirement, even if it’s miles away. They can help you set goals, monitor progress, and make adjustments along the way. And each of these retirement numbers can help you answer a key retirement question:

  • Where will my retirement income come from? Every journey should begin with a goal. Until you know the goal, it is hard to figure out whether you are on the right path. If you are many years away from retirement, estimating your spending needs in retirement could be particularly challenging. However, one handy way to think about your retirement income goal is in terms of where your income will come from in retirement. The important thing is to determine what percentage of your final preretirement annual income you may need to generate from your retirement savings accounts like 401(k)s, 403(b)s, and IRAs, plus pensions. (Read Viewpoints: Where will my retirement income come from?)
  • How much do I need to save for retirement? Once you have an idea about your income replacement needs in retirement, the next question is how much do you need to save to generate that income in retirement. One simple way of thinking about it is with savings factors. A savings factor is a multiple of your income that you should aim to have saved before you retire. You could also use our age-based savings factors as milestones to check your progress toward your retirement goal. (Read Viewpoints: How much do I need to save for retirement?)
  • How much should I save each year for retirement? You should aim to maintain a healthy savings rate throughout your working years, which is the percentage of your income you need to save every year toward your retirement goal. This savings rate goal includes all retirement savings, including any employer contributions to workplace savings accounts. Of course, your savings rate may vary depending on how far away you are from retirement and how much you have already saved, among other factors. (Read Viewpoints: How much should I save each year?)
  • How can I make my retirement savings last? One of the most challenging questions many retirees face is how much to withdraw from their savings in retirement. Withdraw too much and you risk running out of money. Withdraw too little and you may not live the life you want to in retirement. Financial planners often use the concept of a sustainable withdrawal rate to figure out this last piece of the retirement puzzle. This withdrawal rate is defined as an inflation-adjusted annual withdrawal rate, expressed as a percentage of your initial (at retirement) savings balance. For example, say you retire with a nest egg of $1 million and decide that a 4% withdrawal rate is appropriate for you. This means that you could withdraw $40,000 from your savings in your first year of retirement. And then, if inflation is 2.5% over the next year, you could withdraw $41,000 from your savings the following year. (Read ViewpointsHow can I make my savings last?)
  • How am I doing? Answer six simple questions to get your Fidelity Retirement Score.SM You'll see where you stand, how you compare to others, and get steps you can consider to help you improve your retirement readiness.

Retirement age and Social Security benefits are key.

All these guidelines depend on a number of factors, and the age at which you retire has a big impact. The average age for retirement is 62,1 which is an important factor2 because that is when you can start claiming Social Security benefits. However, waiting to claim Social Security until age 70 could substantially increase your monthly benefits—and give you more time to save and fewer years to live off those savings. So the age at which you choose to stop working has a big impact on how much income you need from your own savings. This, in turn, affects other rules of thumb like savings rate, savings factors, and sustainable withdrawal rates.

While you may not be able to pinpoint exactly how much income you may need in retirement, you probably have an idea about when you want to retire. If you're planning to retire early, you may want to use the rules of thumb for age 62. If you are planning to work longer, the rules for age 70 might be more appropriate for you.

We devised a series of guidelines that take into account the important role of retirement age and Social Security. See the following table for a quick summary of how retirement age impacts the other guidelines.

Things to keep in mind

Our guidelines assume no pension income, and we make a number of other assumptions, including continuous employment, uniform wage growth, and contributions increasing with the wage growth. We acknowledge that individual circumstances are different and may vary through time. That is why we have stress tested these guidelines to be successful in nine out of 10 market conditions across a broad range of investment mixes (see footnotes for methodology and other key assumptions3). 

“The important thing to remember is that all these numbers are interconnected,” says Adheesh Sharma, vice president of financial solutions at Fidelity’s Strategic Advisers, Inc. “Looking at them together offers the opportunity to evaluate how one impacts the other.” See the retirement math calculation.

So be sure to check your progress at least yearly. Use our Planning & Retirement Guidance Center (login required) to estimate your retirement readiness, and what you can do to improve it. Along the way, and particularly as you get closer to retirement, it’s always a good idea to work with a financial advisor to create a retirement income plan.

In the meantime, use our general rules of thumb to see if you are on track. As a general guideline based on a retirement age of 67, which is the full Social Security benefits age for those born in 1960 or later, aim to:

  • Save enough to cover at least 45% of your preretirement income,4 after accounting for Social Security.
  • Save at least 10 times (10x) your preretirement income.5
  • Save at least 15% of your income6 over your working life. This includes all retirement savings across different accounts plus any employer contributions.
  • Withdraw at most no more than 4.5% of your initial retirement savings7 beginning at age 67. And then keep increasing this withdrawal based on inflation.

A hypothetical example of our retirement math

Let’s bring these important retirement planning concepts together through a hypothetical example—let’s call her Joanna. Joanna begins working and saving at age 25, and investing her money in an appropriate age-based investment mix that averages at least 50% stocks over her lifetime. In this hypothetical scenario, her income grows to about $100,000 by the time she retires at 67, which is when full Social Security benefits kick in for those born in 1960 or later.

Joanna has been able to save 10x her preretirement income of $100,000, or $1 million, by age 67. That $1 million in savings is enough to generate 45% of her income in retirement, or $45,000. That’s also a 4.5% sustainable withdrawal rate, giving Joanna a high level of confidence that she won’t run out of money, regardless of market performance.

Learn more

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
1. According to the 2014 Gallup poll, "Average U.S. Retirement Age Rises to 62."
2. “The Average Retirement Age – An Update” (2015) by Alicia H. Munnell of the Center for Retirement Research at Boston College.
3. The savings factor, savings rate, and withdrawal rate targets are based on simulations based on historical market data. These simulations take into account the volatility that a variety of asset allocations might experience under different market conditions. Given the above assumptions for retirement age, planning age, wage growth, and income replacement targets, the results were successful in nine out of 10 hypothetical market conditions where the average equity allocation over the investment horizon was more than 50% for the hypothetical portfolio. Remember, past performance is no guarantee of future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical calculations. Returns will also generally be reduced by taxes.
4. The income replacement rate is the percentage of preretirement income that an individual should target replacing in retirement. The income replacement targets are based on Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stat, IRS 2014 tax brackets, and Social Security Benefit Calculators. The 45% income replacement target assumes no pension income, and a retirement and Social Security claiming age of 67, which is the full Social Security benefit age for those born in 1960 or later. For an earlier retirement and claiming age, this target goes up due to lower Social Security retirement benefits. Similarly, the target goes down for a later retirement age. For a retirement age of 65, this target is defined as 50% of preretirement annual income and for a retirement age of 70, this target is defined as 40% of preretirement income.
5. The savings factor is a multiple of income that an individual should aim to have saved by a given age. For example, you should aim to have saved 1x your current income by age 30. Fidelity developed a series of income multiplier targets corresponding to different ages, assuming a retirement age of 67, a 15% savings rate, a 1.5% constant real wage growth, a planning age through 93, and an income replacement target of 45% of preretirement income (assumes no pension income). The final income multiplier is calculated to be 10x your preretirement income and assumes a retirement age of 67. For an earlier retirement age, this target goes up due to lower Social Security retirement benefits and a longer retirement horizon. Similarly, the target goes down for a later retirement age. For a retirement age of 65, this target is defined as 12x and for a retirement age of 70, this target is defined as 8x. See footnote No. 3 for investment growth assumptions.
6. Fidelity’s suggested total pretax savings goal of 15% of annual income (including employer contributions) is based on our research, which indicates that most people would need to contribute this amount from an assumed starting age of 25 through an assumed retirement age of 67 to potentially support a replacement annual income rate equal to 45% of preretirement annual income (assuming no pension income) through age 93. See footnote No. 3 for investment growth assumptions.
7. The sustainable withdrawal rate is defined as an inflation-adjusted annual withdrawal rate, and expressed as a percentage of your initial (at retirement) savings balance. This rate is estimated to be 4.5%, assuming a retirement age of 67 and a planning age through 93. See footnote No. 3 for investment growth assumptions
Guidance is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions. We encourage you to build a retirement plan based on your personal time horizon, risk tolerance, retirement goals, and financial situation.
The savings factor, savings rate, and withdrawal rate targets are hypothetical illustrations, do not reflect actual investment results or actual lifetime income, and are not guarantees of future results. Targets do not take into consideration the specific situation of any particular user, the composition of any particular account, or any particular investment or investment strategy. Individual users may need to save more or less than the illustrated targets depending on their retirement age, life expectancy, market conditions, desired retirement lifestyle, and other factors.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

741021.3.1
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.