Financial services giant Fidelity has a rule for Retirement You may have heard of savings: Put away 10 times your annual salary at 67 for retirement. This oft-cited guide can help you identify a retirement savings goal, but it doesn’t fully explain what those goals should be. Savings It is covered by pension.
Enter Fidelity’s 45% rule, which states that your retirement savings must generate 45 percent of your pre-tax, pre-retirement income each year, with Social Security benefits covering the rest of your spending needs.
A financial advisor can analyze your income needs and help you plan for retirement. Find a consultant today.
The financial services firm analyzed spending data for workers aged 50 to 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 day-to-day expenses and typically don’t contribute to retirement accounts, their income needs are lower than those who are still working.
As a result, a retiree earning $100,000 a year would need between $55,000 and $80,000 a year. Social security Benefits and savings (including retirement benefits) to continue their current lifestyle.
Fidelity’s 45% guideline stipulates that a retiree’s nest egg should be sufficient to replace 45% of pre-retirement income each year. Following this rule, a retiree earning $100,000 would need to save enough money to spend $45,000 a year in addition to Social Security benefits to support their lifestyle. Assuming the person lives another 25 years after reaching retirement age, this person would need $1.125 million in savings.
If you’re ready to be matched with local advisors who can help you achieve your financial goals, Start now.
Pre-retirement income plays an important role
But not all retirement spending plans are created equal. People who earn less during their working lives save less than people with higher incomes, so they need to replace more of their income before retirement.
“Your salary plays a big role in determining what percentage of your income you should replace in retirement,” Fidelity wrote in a recent Viewpoints. “High earners spend a smaller portion of their income during their working lives, and that means the goal is to replace a percentage of lower income to maintain their lifestyle in retirement.”
According to Fidelity, someone earning $50,000 a year needs savings and Social Security to replace 80 percent of their income in retirement. An individual earning $200,000, however, can replace only 60 percent of it in retirement.
Social Security plays a smaller role in the retirement plans of high-income workers. Consider the table below:
Income Replacement Using the Fidelity 45% Rule Pre-Retirement Income Replacement Value Replacement Amount from Savings Replacement Amount from Social Security Total Replacement Amount $50,000 45% 35% 80% $100,000 45% 27% 72% $200,000 $000 1% 55 %
According to Fidelity, a retiree earning $50,000 a year receives 35 percent of their income through Social Security. But the top earner of $300,000 a year has only 11% of his income replaced by Social Security benefits. Individuals with high incomes do not need to replace their income before retirement, retirement savings play a more important role for these retirees.
The Fidelity 10x rule of thumb is an excellent guideline to follow when saving for retirement over several decades. But when retirement arrives, Fidelity recommends that your savings should cover 45% of income needs, with Social Security covering the rest. As a result, the average retiree must replace between 55% and 80% of pre-retirement pre-tax income to maintain their current lifestyle.
Tips for retirement planning
A Financial advisor It can be an invaluable asset when planning for 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 It matches you with up to three financial advisors in your area, and you can interview your advisor at no cost to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, Start now.
Although people start collecting Social Security benefits at age 62, delaying collecting can result in higher benefits. SmartAsset’s Social Security Calculator It can help you develop a savings plan that maximizes your benefits and allows you to enjoy retirement.
Photo Credit: ©iStock.com/AscentXmedia, ©iStock.com/Kameleon007, ©iStock.com/FatCamera
Post Should the 45% Rule Guide Your Retirement Strategy? It appeared at first SmartAsset Blog.