Is Fidelity’s 45% Rule the Right Retirement Strategy for You?

Financial services giant Fidelity has a retirement savings rule that you may have heard of: keep 10 times your annual retirement salary by age 67. for how much of those savings will cover in retirement.

Enter Fidelity’s 45% rule, which says your retirement savings should generate about 45% of your pre-tax, pre-retirement income each year, with Social Security benefits covering the rest of your spending needs.

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The financial services firm analyzed spending data for working people aged 50 to 65 and found that most retirees need to replace between 55% and 80% of their income before retirement to maintain their current lifestyle. Because retirees have lower day-to-day expenses and typically don’t contribute to retirement accounts, their income requirements are lower than people who are still working.

As a result, a retiree earning $100,000 a year would need between $55,000 and $80,000 a year in Social Security benefits and savings withdrawals (including pension benefits) to continue their current lifestyle.

Fidelity’s 45% guideline dictates that a retiree should be old enough to replace 45% of their pre-retirement, pre-tax income each year. Following this rule, the same retiree earning $100,000 a year would need enough savings to spend $45,000 a year, on top of his Social Security benefits, to fund his lifestyle. Assuming the person lives another 25 years after reaching retirement age, this person would need $1.125 million in savings.

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Pre-retirement income plays an important role

But all retirement spending plans are not created equal. Those who earned less money during their careers will have less savings than high earners, and as a result will need to replace a greater proportion of their income before retirement.

“Your salary plays an important role in determining what percentage of your income you’ll need to replace in retirement,” Fidelity wrote in its latest views. “Higher earners tend to spend a small portion of their income during their working years, and that means a goal to replace lower incomes in percentage terms to maintain their lifestyle in retirement.”

According to Fidelity, a person earning $50,000 a year would need savings and Social Security to replace about 80 percent of their income in retirement. However, a person earning $200,000 could get by in retirement replacing only 60%.

The story continues

Social Security plays a less significant role in the retirement plans of higher-income workers. Consider the table below:

Income Replacement Using Fidelity’s 45% Rule Pre-Retirement Income Replacement Rate from Savings Social Security Replacement Rate $50,000 45% 35% 80% $100,000 45% 27% 72% $200,000 4% $100,000 1 4% % 55 %

According to Fidelity, a retiree who earned $50,000 a year would receive 35 percent of that income through Social Security. But a high earner who earned $300,000 a year would see only 11 percent of his income replaced by Social Security benefits. While higher earners don’t need to replace as much of their income before retirement, retirement savings play a bigger role for these types of retirees.

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Conclusion

Fidelity’s 10x Rule of thumb is a nifty guide to follow as you save for retirement over decades. But when retirement arrives, Fidelity recommends that your savings cover 45 percent of your income needs, with Social Security covering the rest. As a result, the average retiree will need to replace between 55% and 80% of their pre-retirement, pre-tax income to maintain their current lifestyle.

Tips for planning your retirement

• A financial advisor can be an invaluable resource when it comes to retirement planning. Whether it’s saving in tax-advantaged accounts or mapping out your income needs, an advisor can help with your retirement planning needs.

  Finding a qualified financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three financial advisors serving your area, and you can interview advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your goals financial, start now.

• While people can start collecting Social Security benefits at age 62, delaying collecting will result in higher benefits. SmartAsset’s Social Security Calculator can help you develop a collection plan that allows you to maximize your benefits and enjoy retirement.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and provides marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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