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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.
Fidelity’s formula for retirement savings includes a few core assumptions:
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.
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.
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.
For example:
Both individuals have different spending patterns, meaning their retirement savings needs will vary significantly.
Fidelity’s formula doesn’t consider additional income streams, such as:
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.
Instead of relying on general rules, crafting a personalized retirement plan is essential. Here’s how you can tailor your strategy:
Start by identifying your expected retirement expenses. Consider:
Factor in all potential income streams, including:
This provides a clearer picture of how much your portfolio needs to cover.
A solid withdrawal plan is key to ensuring your savings last. Consider strategies like:
For example, with $1 million saved and $24,000 from Social Security, you could safely withdraw about $7,100 monthly, adjusting for market fluctuations.
Guardrails provide a structured method to adjust spending based on portfolio performance:
This dynamic strategy helps you avoid running out of money while enjoying your retirement years.
Fidelity’s rule may serve as a starting point, but a personalized plan offers greater accuracy by considering:
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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