Fidelity Has the Right Idea, but Published the Wrong Answer

Fidelity tried to help savers by offering a simple way of gauging whether they are on track to a secure retirement. The bottom line message was that the Americans need to get serious about upping their savings. We certainly agree with this conclusion, as indicated by this article.

Fidelity boiled the needed savings down to the following:

While every individual’s situation will differ greatly based on desired lifestyle in retirement, the average worker may replace 85 percent of his pre-retirement income by saving at least 8 times his ending salary. In order to reach the 8X level by age 67, Fidelity suggests workers have saved about 1 times their salary at age 35, 3 times at age 45, and 5 times at age 55.”

Fidelity’s recommended milestones are way too low. For example, the formula we linked to above instructs one to have roughly 23 times annual income to replace 100% of one’s earnings and no social security. If one were to adjust this for 85% of earnings (see this article for Fidelity’s assumptions), with an estimate of 10% of one’s needs coming from social security, the 23 times is reduced to around 17 times, or roughly twice what Fidelity states. Do even the most basic modeling, and you will quickly find that a retiree will quickly run out of money if only eight times one’s salary is saved. This interactive online retirement planner will help you understand retirement withdrawal rates, and see the result of Fidelity’s too small recommendations.

One of Fidelity’s assumptions is an overly pessimistic assumption of a 5.5% annual return. This may be a realistic earnings rate in current economic conditions, although much lower than what would have been routinely used pre-2009. Although the online calculator at this article is initially presented for an entirely different reason, the interactive calculator shows historical rates of returns for stocks and bonds. Over one’s entire work life, I believe that the historical returns identified in this calculator are the best data-based result that is available about what the future will present.


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