Fidelity’s new rules of thumb for retirement

The new rule of thumb comes from Fidelity Investments (U.S.) using models based on American retirement plans, employer contributions and a 5.5% annual return. It also assumes that the employee's income grows by 1.5% a year (over and above inflation).

Other assumptions: start work at age 25, retire at 67 and live to 92. 

All of these assumptions may not apply to Canadians given the differences in tax structures between the two countries, but Fidelity's research adds to my argument that Canadians are generally not saving way enough money for their retirement and are overly reliant on real estate as a source of retirement savings. 

The new rule of thumb announced by Fidelity: 

“Employees need eight times their ending salary to meet basic retirement income needs.” 

This rule replaces the old rule of accumulating enough money to generate 75% -85% of your pre-retirement income. 

 Fidelity suggests goal posts or markers along the way: 

"... will require that a worker save about one time his or her salary at age 35, three times his or her pay at 45 and five times the salary at age 55. " 

How much in percentage terms should an American be saving?  

"... continuous contributions to a retirement plan, starting at 6% of salary when he or she starts saving at age 25, and rising 1% per year until reaching 12%. Additionally, the worker is getting an additional, ongoing 3% contribution from the employer during their working life." 

If you are reading the above percentages, your jaw should be dropping. To reiterate, Fidelity suggests saving 6% of your income when you start working at 25 and by age 31 you need to be saving 12% a year! It gets worse too. Their model assumes your employer is kicking in an additional 3% a year into your retirement plan. If you don't have a employer sponsored retirement savings plan where you work, you'll have to save even more than 12% a year - let's call it 15% a year. 

Are you saving 15% a year? 

For a household income of say, $50,000 per year that's $7,500 per year or $625 per month. 

If you have an existing monthly PAC of $100.00 per month, it might be time to bump up that amount - a lot. 

If you haven't started a monthly investment program, the best time to start is right now. 

If you want to put your retirement savings plan in high gear, contact me at gszlagowski@assante.com. 

Source: Fidelity’s new rules of thumb for retirement by Chuck Jaffe, MarketWatch Sept. 14, 2012

http://www.marketwatch.com/story/fidelitys-new-rules-of-thumb-for-retirement-2012-09-14