May 8, 2023
Everybody craves a benchmark. They give us guidance, a target, an easily understood standard. So it’s little wonder that one of the most popular financial Google searches is some variation of this question: How much money will I need in retirement?
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For many people, retirement is simultaneously a bonanza of free time, full of travel, hobbies and passionate pursuits.
But once you leave that full-time job behind — along with the 401(k) employer match, health insurance and other benefits — here come the sobering snags: Medical care. Rising costs for everything. And a nest egg eaten away by required minimum distributions, taxes and even market slumps.
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What may be surprising, however, is that a popular recent answer to that retirement amount question — Fidelity Investments’ counsel to sock away 10 times your current annual income by age 67 — may be one of the most contentious pieces of advice on the retirement web.
Let’s explore why the 10 times rule may be no good rule at all.
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When 10 times may not be enough
Fidelity is a highly respected investment house, and their advice is rooted in deep experience in retirement planning for clients. But some financial experts believe Fidelity’s 10 times guidance undershoots the real cost of retirement.
Financial consultant Grant Cardone has written that inflation and the risk of unplanned emergency spending — like a catastrophic health event or emerging condition — could mean that target falls short. Not only would that leave you exposed, it could undermine the feeling of financial independence we all want in retirement.
Inflation and health costs are among the expenses that shock retirees who simply aren’t saving enough, Cardone said.
“I know the idea that ‘a million dollars isn’t enough to retire on’ is hard to swallow,” he wrote. “But your opinion doesn’t change the reality: A million dollars is simply not what it used to be.”
Health expenses alone should have many folks writing their plans in pencil, not pen. Consider Fidelity’s own 2022 guidance that a retiring 65-year-old American couple can expect to spend $315,000 on medical and health expenses in retirement — a 5% jump over 2021.
When 10 times may be … too much?
Two key variables offer intriguing counters to Cardone. First: How much are you willing to save at the expense of enjoying your more mobile years?
First, consider that the vast majority of retirement advice hinges on what you’re doing today to plan and fund tomorrow. Of course that’s a sound outlook. But is there too much of a good thing?
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Consider Cardone’s advice to go beyond — perhaps way beyond — Fidelity’s guidance.
Using a retirement calculator, a 53-year-old making $100,000 a year, with $500,000 in their 401(k) and who plans to retire at 67, would have to save at least $3,300 a month — or nearly 40% of their income — to reach a nest egg of about $1.6 million.
That amount exceeds Fidelity’s guidance, and some folks might be able to sock that much away, or more. But for many, that level of investment could affect their quality of life in pre-retirement and leave precious little left after bills and other obligations are met.
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Everyone is unique
Another variable is the notion of how your priorities will affect your anticipated spending.
Will you spend those first few years of retirement traveling the globe? Then yes, Fidelity’s figure may be low when you factor the cost of that travel plus all of life’s expected expenses as you age.
It’s also possible your needs, and costs, may diminish in retirement.
You may find you have to choose volunteerism over non-stop travel, home cooking over eating out, or athletic or artistic hobbies over expensive cars. But with those steps, suddenly you’ll find there’s a way better chance your 5 or even 3 times savings will go the distance for you.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
