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Retirement savings yardstick

By Jennie L. Phipps ·
Wednesday, September 12, 2012
Posted: 4 pm ET

The questions -- How much retirement savings is enough? Am I on track to accumulate a sufficient amount? -- are questions that baffle even the most financially sophisticated.

Fidelity Investments gets these two questions so often that it devised a formula to help people measure their retirement planning progress.

According to Fidelity's calculations, a single employee should save at least eight times his final salary in order to replace 85 percent of his pre-retirement income -- enough to live comfortably from ages 67 to 92.

To achieve this, a worker must make continuous annual contributions to a 401(k) or other workplace savings plan matched by his employer. His savings would begin at 6 percent of his salary and rise 1 percent for each of the first six years until he is saving 12 percent annually for the remaining years. His employer makes a 3 percent employer contribution annually. Other factors include the following.

  • A 2.3 percent average annual cost-of-living adjustment and an annual 1.5 percent merit increase -- that we should all be so lucky.
  • His savings will earn an average of 5.5 percent over the 42 years of work.
  • There will be no periods of unemployment.
  • The worker will be able to claim Social Security at age 67.

"Eight times final salary is the minimum," says Jeanne Thompson, Fidelity's vice president for market insights. "For individuals who think they might need more in retirement, we recommend saving as much as 12 times final salary."

This formula also doesn't fully take into account a couple's situation or the outlook for someone with an old-fashioned defined benefit pension or money from other sources. It also doesn't make a distinction between saving in a conventional 401(k) and saving in a Roth. But as Thompson says, "This is just a rule of thumb and a simple way to show that saving this amount of money is achievable if you start early and save steadily."

Below is the chart so you can measure for yourself how you're doing.

Fidelity age-based savings guidelines
Age x Salary
25 0x
30 0.5x
35 1x
40 2x
45 3x
50 4x
55 5x
60 6x
67 8x
Source: Fidelity Investments.
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