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How much do I need to save for retirement?

Savings factor: Aim to save at least 1x your income at 30, 3x at 40, 7x at 55, 10x at 67.

Fidelity Viewpoints

– 06/05/2017

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Saving for Retirement

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You know that saving is important. After all, you want to enjoy your someday—your retirement. Be free from the 9-to-5, and do what you want to do—when you want.

Living your someday the way you want means having a roadmap now—including how much to have saved by the time you retire, as well as different points along the way. That’s why we did the analysis and came up with four key metrics: a yearly savings rate, a savings factor, an income replacement rate, and a potentially sustainable withdrawal rate to help you create your retirement roadmap. (See chart.)

They are all interconnected, so it is important to keep each in mind as you save for retirement, and understand how they work together. For instance, if you want to retire earlier than 67, your savings rate and how much you need to save would likely increase. Retire later and they would likely decrease.

We will focus on each guideline in separate Viewpoints articles. (To read about all our retirement guidelines, see the Viewpoints special report: Retirement rules of the road.) Here we focus on the savings factor—how much you should aim to have saved along the way to retirement.

The savings factor explained

Our savings factors1 can help you track where you are on your journey to retirement. Simply multiply your income at certain ages by your savings factor to see how much you should aim to have saved by that point. Then see how your savings match up.

“Setting up a savings goal linked to your income can help simplify your planning, and help you determine if you are on track throughout your working life,” says Ken Hevert, Fidelity senior vice president of retirement. “Having a guidepost is particularly important in today’s workplace, where job switching, and life’s inevitable twists and turns, can get in the way of saving for retirement.”

Our savings factor rule of thumb is based on some key assumptions: You start saving a total of 15% of your income every year starting at age 25, invest more than 50% of your savings in stocks on average over your lifetime, retire at age 67, and plan to maintain your preretirement lifestyle (see footnote 1 for more details).

Of course, your situation may be different. You may have started saving later, saved more or less, plan to retire earlier or later, expect to spend more or less in retirement, or have a substantial pension. These will all impact your personal savings factors, which is what really counts.

“Think about these savings factors as milestones along the way,” says Adheesh Sharma, director of financial solutions for Fidelity Strategic Advisers, Inc. “And don’t worry if you are not always on track. The later milestones are the most important, and there are things you can do along the way to catch up. Of course, the earlier you take action the better.”

Our simple tool shows how two key assumptions—when you plan to retire and what kind of lifestyle you want to live in retirement—have the most impact on how much you need to have saved when you do retire. Let’s take a closer look at each of them.

1. When you’ll retire

What age you plan to retire can have a big impact on how much savings you will need, and your milestones along the way. The longer you can postpone retirement, the lower your savings factor needs to be.

Consider some hypothetical examples (see graphic below left). Max plans to delay retirement until age 70, so he will need to have saved 8x his final income to sustain his preretirement lifestyle. Amy wants to retire at age 67, so she will need to have saved 10x her preretirement income. John plans to retire at age 65, so he would need to have saved at least 12x of his preretirement income.

Of course, you can’t always choose when you retire—health and job availability may be out of your control. But one thing is clear: Working longer will make it easier to reach your savings goals.

2. How you want to live in retirement

In other words, do you expect your expenses to go down when you retire? We call that a below average lifestyle. Or will you spend as much as you do now—or more? That's average. If you expect your expenses will be more than they are now, that's above average.

Let’s look at some hypothetical examples (see graphic above, right). Joe is planning to pay off his mortgage and expects his expenses to be a lot less in retirement. He is a homebody. He expects that he will live the same way when he is in retirement. His savings factor might be closer to 8x than 10x. Elizabeth is planning to retire at age 67 and her goal is to maintain her lifestyle in retirement, so her savings factor is 10x. Sean works long hours and has four children to raise and educate. He wants to do what he wants, when he wants, in retirement, including travel a lot. It makes sense for him to aim to save more. His savings factor is 12x at age 67.

How to help reach the milestones

Knowing your savings factors can give you a baseline savings goal and milestones along the way to see how you are doing. How to get there is another piece of the puzzle. If you’re under age 40, the simple answer is to save more and invest for growth through a diversified investment mix. Of course, stocks come with more ups and downs than bonds or cash, so you need to be comfortable with those risks. If you’re over 40, the answer may be a combination of increased savings, reduced spending, and working longer, if possible. Read Viewpoints: "The three A's of successful savings."

“Don’t be discouraged if you aren’t at your nearest milestone—there are ways to catch up to future milestones through planning and saving,” says Sharma. “The key is to take action.”

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Past performance is no guarantee of future results.

1. The 10x savings rules of thumb are developed assuming age-based asset allocations consistent with the equity glide path of a typical target date retirement fund, a 15% savings rate, a 1.5% constant real wage growth, a retirement age of 67, and a planning age through 92. The replacement annual income target is defined as 45% of preretirement annual income and assumes no pension income. This target is based on Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stat, IRS 2014 tax brackets, and Social Security Benefit Calculators. Fidelity developed the salary multipliers through multiple market simulations based on historical market data, assuming poor market conditions to support a 90% confidence level of success. These simulations take into account the volatility that a typical target date asset allocation might experience under different market conditions. Volatility of the stocks, bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks (domestic and foreign) are represented by Ibbotson Associates SBBI S&P 500 Total Return Index, bonds are represented by Ibbotson Associates SBBI U.S. Intermediate Term Government Bonds Total Return Index, and short term are represented by Ibbotson Associates SBBI 30-day U.S. Treasury Bills Total Return Index, respectively. It is not possible to invest directly in an index. All indexes include reinvestment of dividends and interest income. All calculations are purely hypothetical and a suggested salary multiplier is not a guarantee of future results; it does not reflect the return of any particular investment or take into consideration the composition of a participant’s particular account. The salary multiplier is intended only to be one source of information that may help you assess your retirement income needs. Remember, past performance is no guarantee of future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical calculations. Returns also will generally be reduced by taxes.

2. The 45% income replacement target assumes a retirement and Social Security claiming age of 67, which is the full Social Security benefit age for those born in 1960 or later. For an earlier retirement and claiming age, this target goes up due to lower Social Security retirement benefits. Similarly, the target goes down for a later retirement age. For a retirement age of 65, this target is defined as 50% of preretirement annual income, and for a retirement age of 70, this target is defined as 40% of preretirement income. As the income multiplier target is based on income replacement target and retirement age, for an earlier retirement age, this target goes up due to lower social security retirement benefits and a longer retirement horizon. Similarly, the target goes down for a later retirement age. For a retirement age of 65, this target is defined as 12x and for a retirement age of 70, this target is defined as 8x. See footnote 1 for investment growth assumptions.

3. Fidelity analyzed the household consumption data for working individuals age 50 to 65 from Consumer Expenditure Survey 2011, U.S. Bureau of Labor Statistics. The average income replacement target of 45% is based on the objective of maintaining a similar lifestyle to before retirement. This target is defined at 35% for ”below average” lifestyle and 55% of preretirement income for ”above average” lifestyle. Therefore, the final income multiplier target of 10x the final income goes down to 8x for ‘below average’ lifestyle and increases to 12x for ‘above average’ lifestyle. See footnote 1 for investment growth assumptions.

Retirement savings factors are hypothetical illustrations, do not reflect actual investment results or actual lifetime income, and are not guarantees of future results. Targets do not take into consideration the specific situation of any particular user, the composition of any particular account, or any particular investment or investment strategy. Individual users may need to save more or less than the savings target displayed depending on their inputs retirement age, life expectancy, market conditions, desired retirement lifestyle, and other factors.

Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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