When it comes to how much money you will need in retirement, the only number that counts is the number 10. As in 10 times your final salary.
That’s the word according to Fidelity Investments – or, more precisely, the amount the investment management firm says you will need to have saved up in order to live well, if you want to retire at age 67.
When planning for retirement, Fidelity suggests using four metrics: an annual savings rate, a savings factor or benchmark, an income replacement rate and a sustainable withdrawal rate. These metrics are interconnected, so a change in one affects the others. Also, within each metric are factors that can affect that metric alone.
Master These 4 Metrics
Annual Savings Rate
Let’s say you start saving for retirement no later than age 25 (see Why Save For Retirement In Your 20s? if that sounds sort of young). Fidelity suggests you need to put aside 15% of your salary each year.
This, of course, is only a starting point. If you start saving later in life, the rate needs to be higher. For example, your savings rate if you begin at age 30 would be 18%; 23%, if you wait until you are 35 to begin.
The 15% savings rate is also predicated on you retiring at the age of 67. Obviously, if you want to retire earlier (or later), the rate would likely need adjustment.
Once you’ve started saving and investing, the savings factor metric will tell you if you are on track to meet your goals. The goal is:
By age 30: Accumulate the equivalent of your annual income that year
By age 40: Three times that income
By age 55: Seven times
By age 67: When you say sayonara to the working-stiff life,10 times your income
Yes, your savings rate increases as you age. But among the assumptions Fidelity makes is that your income will grow 1.5% per year after inflation and that you will invest more than 50% of your savings in stocks.
You can use the savings factor to adjust your savings rate or account for other factors – such as…