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As couples plan for retirement, there is a helpful checklist they ought to consult to make sure they have enough money to maintain their accustomed lifestyle after they quit working.
It’s the impossible dream to many people: coming up with enough money to retire well. But Fidelity investments has come up with a new strategy to figure out if you are saving enough and not just making it a race to The Number.
The Number, of course, is the total you need to assure an adequate retirement. For some of us it’s like those medical charts telling you the optimal weight for your height. Great, but how do I get there?
For the savings-challenged, Fidelity’s Number is still daunting: You will need to have saved eight times your final salary by age 67 if you want to maintain a lifestyle similar to the one you have had while working, the company's planners figure. But Fidelity says it’s easier to get to the peak if you think of it as a series of manageable milestones through life.
To reach the 8x altitude, Fidelity says, here are check-down markers for getting to the golden peak at the right time:
- 1x — Reach age 35 with one times your annual salary saved.
- 3x — By 45, accumulate three times your salary.
- 5x — When you are 55, your savings should have risen to five times your salary.
- 8x — You are there. It is age 67.
Seems easier than climbing to the 8x level all at once, right? That’s the idea. If you follow the rule of thumb, your savings along with Social Security will likely deliver 85 percent of your ending salary until you reach age 92.
“These savings targets offer a rule of thumb to help employees get engaged in retirement planning by making it simpler and more achievable,” said James M. MacDonald, president of workplace investing at Fidelity Investments.
Fidelity admits the rule of thumb might not work in all situations. But it offers a plan for millennials, gen-Xers and baby boomers increasingly skeptical that they will ever be able to retire.
Boomers already are swelling the ranks of the retired at a rate never seen before. Each day 10,000 Americans reach age 65. As they do so they are less likely to acknowledge the "R" word: retirement. A recent Pew Research Center study found that they believe "old age" begins at 72, and on average they feel nine years younger than their true age. Far more of them plan to work full or part time to an older age than the generation that retired before them.
The fact the “Forever Young” generation is working longer into life might say more about lack of savings than feeling young for their age. The financial collapse of 2008 blew up savings plans, and low rates on fixed-income investments have had a hugely negative impact on financial plans.
“Retirement age is creeping up. And that may show that people have not have done the necessary steps to save enough and need to keep working,” said Jean Setzfand, vice president of financial security at AARP.
Some people might get “shocked and discouraged” when they hear they are far short of what they need to retire. The Fidelity savings plan, and similar lifelong saving plans, could help people think realistically about saving money over time, Setzfand said. But it is only a start.
“Generally, retirement savings calculators and self-assessments are great tools. The thing they do is create an 'aha' moment for people, a point of realization,” Setzfand said.
Even if people end up discouraged, as many are, “the seed is planted, and they are more aware of the need to save and plan.” And research shows that people who undertake self-assessment get more serious about saving more, she said. The eight-times salary rule of thumb recommended by Fidelity is “in line with a lot of others.” AARP's own figure is nine times, she added.
“Rules of thumb are a rigid way of looking at retirement — but (it's) easy to wrap your head around a figure that can go on the back of an envelope,” she said. “It’s better to use a more sophisticated calculator that lets you customize for your own needs. The most important thing is to get a clear understanding of what retirement means to you and get a better look at what you need to finance that kind of life.”
Personal finance expert Carmen Wong Ulrich says for some first-time home buyers, interest rates are lower right now. If you need to take money out of a Roth IRA for the purchase, she advises you replenish it so you're continuing to build your retirement savings.
There are many variables in each person’s financial profile that the rule of thumb might not account for. Whatever they might be, goal-setting is a good way of jump-starting savings, Setzfand said — and the younger the better.
Fidelity lays out the steps savers need to reach their 8x level. It means contributing 6 percent a year to a workplace savings plan and raising that total 1 percentage point each year until you reach 12 percent. The assumption is that employers will add 3 percent in matching funds.
In its calculation, Fidelity factors in a 1.5 percent annual salary increase and average portfolio growth of 5.5 percent a year.
“The two factors that have the greatest impact on retirement savings over time are starting early and saving consistently,” said MacDonald. He added: “Having age-based targets provide benchmarks to help retirement savers stay on track toward their ultimate goal.”
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