Jun 14, 2024
One of the hardest things about saving for retirement is figuring out how much money you’re going to need. You'll often hear $1 million tossed around as an optimal savings target.
But in reality, your savings goal should hinge on the amount of replacement income you need to maintain your standard of living.
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That's why Fidelity's advice for retirement makes sense for many Americans. Fidelity suggests aiming for 10 times your final salary in savings at the time of your retirement.
What works about this formula is that it's specific to you. But there's also wiggle room with that number.
Setting goals throughout your career
Fidelity’s guidance on retirement savings would see you meeting different savings milestones over your career. Specifically, they say to save:
- The equivalent of your salary by age 30
- Three times your salary by age 40
- Six times your salary by age 50
- Eight times your salary by age 60
- 10 times your salary by age 67 (which is full retirement age for Social Security if you were born in 1960 or later)
These goalposts can help you track your savings progress through your working years and give you a better idea of how you stack up at different stages in your career.
Of course, the tricky thing is that as your income increases, your savings goals may have to increase as well if you want to stick to Fidelity’s guidelines. But you can keep up by committing to saving a consistent portion of your income each year — for example, 15% or 20%.
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What type of retirement will 10 times your salary buy you?
Your annual income in retirement doesn’t necessarily have to match your yearly income when you’re working. As a retiree, you may have fewer expenses — for example, a paid-off mortgage and lower fuel spending from not having to commute. So it’s good to evaluate your nest egg in the context of replacement income. Generally speaking, aiming for 70% to 80% replacement income is a solid bet.
With that in mind, let’s say you earn an annual salary of $55,000 by the end of your career. This is roughly in line with median earnings for Americans 65 and older as of the fourth quarter of 2023, according to the Bureau of Labor Statistics.
If you retire with $550,000 and withdraw about 4% of that each year, which is consistent with the 4% rule, that gives you $22,000 in annual income. If you add in $23,000 a year in Social Security, which is about what the average retired worker collects today, that’s $45,000 a year in total, or about 82% replacement income for a $55,000 annual salary. In this example, Fidelity’s guidance seems to work.
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That formula may hold up pretty well for higher earners, too. If you earn $100,000 a year and retire with $1 million, the 4% rule gives you $40,000 in annual income. Someone earning $100,000 today may be eligible for close to $31,000 in annual Social Security income. That’s 71% replacement income, which falls into that suggested range.
However, Fidelity’s formula may not work as well for very high earners. If you end your career earning $200,000 and retire with $2 million, 4% of that is $80,000. Social Security's maximum monthly benefit this year is $3,822, or just under $46,000 annually. Combined, that’s only 63% replacement income.
Do you need to retire with 10 times your salary?
Fidelity’s advice is great to use as a starting point for establishing a retirement savings goal. But one thing it overlooks is the percentage of your salary you actually spend during your working years.
Remember, the whole point of building a retirement nest egg is to have enough money to maintain the lifestyle you're used to or want to lead. If you’re someone earning $100,000 a year who only spends half of that, then you may not need 10 times your salary to live comfortably as a retiree.
There's also the length of your retirement to consider. If you'll be retiring much later than age 67, you probably won't need as much income as someone ending their career earlier. You may also have income available to you other than just from your retirement accounts and Social Security, like a pension or house you've inherited that can generate rental income.
Because of these factors, you don't absolutely have to commit to ending your career with 10 times your final salary. Instead, think about what you want retirement to look like and how much income you'll need to get there.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
