Financial services company Fidelity has a retirement savings rule you may have heard of: Have 10 times your annual salary saved for retirement by age 67. This oft-cited guideline can help you set a retirement savings goal, but it doesn’t account for how much of that savings you’ll use during retirement.
Meet Fidelity’s 45% Rule. This rule states that your retirement savings should provide about 45% of your pre-retirement income each year, with Social Security benefits covering the rest of your expenses.
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The financial services firm analyzed spending data from working people between the ages of 50 and 65 and found that most retirees need to replace between 55% and 80% of their pre-retirement income to maintain their current lifestyle. Because retirees have lower daily expenses and typically don’t contribute to retirement accounts, their income requirements are lower than those of people who are still working.
So a retiree earning $100,000 a year would need between $55,000 and $80,000 a year in Social Security benefits and savings withdrawals (including pension benefits) to maintain his current lifestyle.
Fidelity’s 45% guideline dictates that a retiree’s savings should be large enough to replace 45% of their pre-retirement income, before taxes, each year. Under this rule, the same retiree who earned $100,000 per year would need to save enough to spend $45,000 per year, in addition to their Social Security benefits, to fund their lifestyle. Assuming the person lives another 25 years after retirement age, the person would need $1.125 million in savings.
A financial advisor can help you make projections for your own retirement. Find a financial advisor today.
Pre-retirement income plays an important role
But not all retirement spending plans are created equal. People who earned less money during their careers will have less saved than high earners, and as a result will need to replace a larger portion of their pre-retirement income.
“Your salary plays a big role in determining what percentage of your income you need to replace during retirement,” Fidelity wrote in its most recent Viewpoints. “Higher earners tend to spend a small portion of their income during their working years, and that means a lower replacement target in percentage terms to maintain their lifestyle during retirement.”
According to Fidelity, someone making $50,000 a year would need savings and Social Security to replace about 80% of their income in retirement. However, a person making $200,000 could get by in retirement by replacing only 60%.
Social Security plays a less important role in the retirement plans of higher-income workers. See the table below:
Income Replacement Using Fidelity’s 45% Rule Pre-retirement Income Replacement Rate Savings Replacement Rate Social Security Replacement Rate 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 through Social Security. But a high-income earner making $300,000 a year would only see 11% of their income replaced by Social Security benefits. While higher-income earners don’t have to replace as much of their pre-retirement income, retirement savings plays a more important role for these types of retirees.
Consider hiring a financial advisor if you are interested in personalized, professional financial advice.
Conclusion
Fidelity’s 10x rule of thumb is a useful guideline to follow as you save for retirement over many decades. But when retirement rolls 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 income, before taxes, to maintain their current lifestyle.
Tips for retirement planning
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A financial advisor can be an invaluable resource when it comes to planning for your retirement. Whether it’s saving in tax-advantaged accounts or mapping out your income needs, an advisor 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 who serve your area, and you can interview your advisors for free to determine which one is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Although people can begin collecting Social Security benefits as early as age 62, delaying collection will result in higher benefits. SmartAsset’s Social Security calculator can help you develop a collection plan that will help you maximize your benefits and enjoy your retirement.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid—in an account that isn’t subject to big swings like the stock market. The tradeoff is that the value of liquid assets can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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