How Much Do You Need to Retire? Why Fidelity's Advice May Not Work for Everyone

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When it comes to planning for retirement, understanding how much you need to save is crucial. Popular financial institutions like Fidelity suggest rules of thumb, such as saving 10 times your annual salary by age 67. While this approach might serve as a starting point, it has its flaws. Let’s explore why Fidelity’s guidance may not suit everyone and how you can create a more personalized plan for your retirement.

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Fidelity's Retirement Savings Guidelines: The Basics
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Fidelity’s formula for retirement savings includes a few core assumptions:
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• Save 10 times your annual salary by age 67.
• Save 15% of your income annually, starting at age 25, including employer contributions.
• Invest at least 50% of your portfolio in stocks.
• Plan to retire at age 67 and live until age 93.
• Replace about 45% of your pre-tax income in retirement.
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For example, if you earn $100,000 annually, Fidelity suggests you’ll need $1 million saved by age 67 to retire comfortably. While this might sound reasonable, several limitations make it less applicable to everyone’s unique situation.
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Limitation 1: Not Accounting for Early Retirement
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One of the main drawbacks of Fidelity’s rule is its assumption that everyone retires at 67. In reality, many people aim to retire earlier. If you plan to retire at 60 or sooner, your savings need to stretch further. This longer retirement period requires a more tailored plan to ensure your savings last.
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Limitation 2: Income vs. Expense Focus
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Fidelity’s approach uses an income multiplier, assuming you need to replace a specific percentage of your pre-retirement income. However, this doesn’t account for individual expenses. Your actual retirement needs depend on your spending habits, not your income level.
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For example:
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• Person A earns $100,000 and saves 20% of their income.
• Person B earns $100,000 but saves 50% of their income.
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Both individuals have different spending patterns, meaning their retirement savings needs will vary significantly.
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Limitation 3: Ignoring Other Income Sources
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Fidelity’s formula doesn’t consider additional income streams, such as:
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• Social Security benefits (average monthly benefit: ~$2,000).
• Pensions (though less common today).
• Rental income or other passive income.
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For instance, if you receive $24,000 annually from Social Security and have $45,000 in yearly expenses, you only need $21,000 from your portfolio, not $45,000. This adjustment significantly reduces the amount you need to save.
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The Importance of Personalized Planning
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Instead of relying on general rules, crafting a personalized retirement plan is essential. Here’s how you can tailor your strategy:
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Step 1: Determine Your Retirement Expenses
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Start by identifying your expected retirement expenses. Consider:
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• Fixed costs: Housing, utilities, insurance.
• Variable costs: Travel, hobbies, dining out.
• Healthcare costs: Premiums, out-of-pocket expenses.
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Step 2: Account for Retirement Income Sources
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Factor in all potential income streams, including:
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• Social Security.
• Pensions.
• Rental or investment income.
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This provides a clearer picture of how much your portfolio needs to cover.
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Step 3: Create a Withdrawal Strategy
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A solid withdrawal plan is key to ensuring your savings last. Consider strategies like:
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• The 4% Rule: A guideline suggesting you withdraw 4% of your portfolio annually.
• Retirement Income Guardrails: A flexible approach that adjusts spending based on market performance.
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For example, with $1 million saved and $24,000 from Social Security, you could safely withdraw about $7,100 monthly, adjusting for market fluctuations.
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Benefits of Retirement Income Guardrails
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Guardrails provide a structured method to adjust spending based on portfolio performance:
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• Increase spending: When markets perform well.
• Reduce spending: During downturns to preserve your savings.
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This dynamic strategy helps you avoid running out of money while enjoying your retirement years.
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Why a Personalized Plan Is Better
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Fidelity’s rule may serve as a starting point, but a personalized plan offers greater accuracy by considering:
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• Your desired retirement age.
• Your unique spending habits.
• Additional income sources.
• Market conditions and investment performance.
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Conclusion: Create a Plan That Works for You
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While Fidelity’s savings benchmarks can guide those starting their retirement journey, they often fall short for individuals with specific goals and circumstances. A personalized retirement plan is essential to ensure you save enough to cover your unique needs.
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