How much should people be saving for retirement? The rule of thumb is 15% of salary but that might not be true for everyone – lower compensated people probably cannot afford it and will see a significant percentage of income replaced by Social Security. Fidelity has come up with an easy estimate on multiples of salary.
According to a new report by Fidelity, workers should be have amassed the following account balances by age:
- 30 years old – 1x salary
- 35 – 2x
- 40 – 3x
- 45 – 4x
- 50 – 6x
- 55 – 7x
- 60 – 8x
- 67 – 10x
That may be very tough news for older workers that need to catch up but for younger people who will never get a hint of a DB (defined benefit) plan and are skeptical about whether Social Security will be around when they retire, saving on their own for retirement seems natural. And estimating how much they should be saving by deferral rate may not resonate so a multiple of salary is a simple way to communicate that amount.
Fidelity’s estimates are based on a portfolio that has 50% in stocks with a 3% growth rate which was lowered from 5.5%.
The DOL is working on a rule that would require DC plan statements to state, along with a participant’s account balance, the projected income. The question is whether that projection should be based on the current balance only or if there should be projections based on certain assumptions like deferral rates, salary increases and returns. For example, a 35-year-old with 2x salary saved would be on track according to the Fidelity estimates but the income projection rates based on that amount would fall short of the recommended 40-50% income replacement from DC plans.
Many record keepers provide calculators which project out income which is what some experts suggests the DOL should do. In the meantime, the Fidelity estimates are simple, elegant and easy to understand.
