Fidelity recently announced a simple measure to gauge if you have enough money to retire – or not. Instead of an amount, it simply states you need at least 8x your ending salary in order to cover your retirement expenses to age 92.
However, the devil is in the details. It’s worth exploring these details and assumptions since retirement is – and should be – your largest single goal if you’re still working OR if you’re already retired.
Here are some details about the 8x salary concept:
1. 8x ending salary is the minimum required.
2. This calculation assumes a 25 year retirement period (age 67-92).
3. It assumes 401(k) or other retirement savings participation for 42 years (age 25-67). The assumption is an annual savings of 6% per year, which increases to 1% per year to 12% by the 6th year (e.g. age 31) – along with a 3% employer match.
4. It also assumes other outside savings.
5. It assumes the portfolio grows by 5.5% per year (probably before tax) - which may be an optimistic number.
6. It assumes your income grows by 1.5% per year OVER GENERAL INFLATION, with no breaks in employment or savings.
7. It assumes you receive Social Security payments.
The only “good news” here is that this 8x final salary appears to be based upon a single individual – it’s possible a couple (economies of scale) could get by with less than the 8x salary minimum each.
How many people actually can fit this 8x salary ideal – with all the caveats? I would say a small percentage of Americans…unfortunately. This 8x salary also doesn’t mention the elephant in the room: over $250,000 (in current dollars) alone that's needed to cover out-of-pocket medical . That doesn't include long term care!
Here’s what I think if more typical of Boomers getting ready for retirement:
1. Their income is not growing by 1.5% over inflation per year. Perhaps it's been flat or lagging inflation - not the official "low" CPI number but the true, higher inflation that affects tuition, health care and food prices.
2. Folks may have worked fewer years (say 30 years) than their projected retirement (which could last 30+ years).
3. They could be part of the “sandwich generation” – caring for aging parents AND putting children through college.
4. Their careers may have been interrupted by downsizing or they may (e.g. women) have started work only when their children were older.
5. Folks sometimes jump to take Social Security at age 62 – when it may have made more sense to postpone benefits to age 70 – depending on the situation.
Aging Boomers are stressing our financial systems in ways we never have experienced in our history. The sad reality is that the majority of Americans are not sufficiently prepared for retirement because retirement is lasting longer and longer. Retirement is turning out to be more costly than imagined also due to spiraling medical costs.
It’s never too late to look at your own situation and consider measures that may brighten your retirement picture – e.g. retiring later, downsizing (or moving out of state). Finally, don't be intimidated into buying annuities or other "quick fix" products unless you get an objective 2nd opinion.