How much should I be saving for retirement?

Updated: Dec 19, 2019


It's literally the million dollar question: how much money should we save for retirement? There are some super complex projections out there,a s well as some really easy calculators. Which are the best tool to use? We think any of them... as a starting point.   


Rule of Thumb(s):

1.  Multiply your income by a factor. One rule of thumb is 10X your annual income in the years nearest to retirement (assuming you make the most in those final working years). A more detailed approach is to use a factor from Fidelity's Savings Factor Table. Each year, Fidelity Investments issues a table showing how much one should have saved for retirement, depending on your age, multiplied by a factor. 


2.  Estimate portfolio growth to double every 10 years.  Based on the Rule of 72, an appropriately allocated portfolio can double every 10 years, if it is getting a 7.2 percent return (a bit aggressive these days, but again, a good starting point).  It's possible to take the amount of your investments now and assume they'll double every 10 years. Let's assume you're 35 years old and will retire 30 years from now. Let's also say you've saved $50,000 and have invested in a properly allocated portfolio. It's reasonable to assume that this pot of $50,000 will increase to $400,000 over the next 30 years (3 "doubles;" 100k at age 45, 200k at age 55, 400k at age 65).


Our Recommendation: Consider the above two tools and then to check out some simple retirement calculators. Then, of course, start to save and invest as much as you possibly can in the early years. If you commit to a disciplined investment and savings strategy, and you evaluate it annually (remember, this is a road map, not a destination!), you can set yourself up for a successful and worry-free retirement.  


Your To-Do's:

1. Use the Fidelity Table below to see how you're doing so far.


2. Based on what you have, or what you will have invested in the near future, use the rule of 72. If your portfolio is doubling every 10 years, are you nearing what you'll need?


3. Assume 4 percent of your portfolio can be generated each year to generate enough income during retirement. If your finances are properly allocated, this is a fine assumption to make. Keep in mind that an investment advisor or robo advisor will help you do this based on your age and risk appetite. So if you have $1,000,000 saved by retirement you can reasonably assume that $40,000 in interest will be yours to spend without touching principal.


4. Lastly, play around with free online tools.  


Source: Fidelity Investments.  The 10x savings rules of thumb are developed assuming age-based asset allocations consistent with the equity glide path of a typical target date retirement fund, a 15% savings rate, a 1.5% constant real wage growth, a retirement age of 67, and a planning age through 92. The replacement annual income target is defined as 45% of preretirement annual income and assumes no pension income. This target is based on Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stat, IRS 2014 tax brackets, and Social Security Benefit Calculators. Fidelity developed the salary multipliers through multiple market simulations based on historical market data, assuming poor market conditions to support a 90% confidence level of success. These simulations take into account the volatility that a typical target date asset allocation might experience under different market conditions. Volatility of the stocks, bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks (domestic and foreign) are represented by Ibbotson Associates SBBI S&P 500 Total Return Index, bonds are represented by Ibbotson Associates SBBI U.S. Intermediate Term Government Bonds Total Return Index, and short term are represented by Ibbotson Associates SBBI 30-day U.S. Treasury Bills Total Return Index, respectively. It is not possible to invest directly in an index. All indexes include reinvestment of dividends and interest income. All calculations are purely hypothetical and a suggested salary multiplier is not a guarantee of future results; it does not reflect the return of any particular investment or take into consideration the composition of a participant’s particular account. The salary multiplier is intended only to be one source of information that may help you assess your retirement income needs. 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 also will generally be reduced by taxes. 


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