Financing Longevity

The Math Of Retirement Savings

Four key guidelines to help your clients know where they stand on retirement’s journey

New research from Fidelity Viewpoints. Reprinted with permission. Visit

Everyone’s road to retirement is personal, with twists and turns that are unique to their situation. Yet most of us grapple with the same, sometimes elusive, questions, usually starting with “how much?”.

Of course, no one knows the precise answers to these questions because you don’t know what life—or the markets—will bring. Still, you need to know where you stand to make decisions along the way that will help you have choices as retirement nears.

“Our guideposts can help you take the wheel, and have greater confidence, no matter what surprises the markets or life deliver,” says Ken Hevert, Fidelity senior vice president of retirement. Our guideposts or “retirement math” may help you stay on track for your retirement, even if it’s miles away. They can help you set goals, monitor progress, and make adjustments along the way.

And each of these retirement numbers can help you answer a key retirement question:

Where will my retirement income come from?
Every journey should begin with a goal. Until you know the goal, it is hard to figure out whether you are on the right path. If you are many years away from retirement, estimating your spending needs in retirement could be particularly challenging. However, one handy way to think about your retirement income goal is in terms of where your income will come from in retirement. The important thing is to determine what percentage of your final preretirement annual income you may need to generate from your retirement savings accounts like 401(k)s, 403(b)s, and IRAs, plus pensions.

How much do I need to save for retirement?
Once you have an idea about your income replacement needs in retirement, the next question is how much do you need to save to generate that income in retirement. One simple way of thinking about it is with savings factors. A savings factor is a multiple of your income that you should aim to have saved before you retire. You could also use our age-based savings factors as milestones to check your progress toward your retirement goal.

How much should I save each year for retirement?
You should aim to maintain a healthy savings rate throughout your working years, which is the percentage of your income you need to save every year toward your retirement goal. This savings rate goal includes all retirement savings, including any employer contributions to workplace savings accounts. Of course, your savings rate may vary depending on how far away you are from retirement and how much you have already saved, among other factors.

How can I make my retirement savings last?
One of the most challenging questions many retirees face is how much to withdraw from their savings in retirement. Withdraw too much and you risk running out of money. Withdraw too little and you may not live the life you want to in retirement.

Financial planners often use the concept of a sustainable withdrawal rate to figure out this last piece of the retirement puzzle. This withdrawal rate is defined as an inflation-adjusted annual withdrawal rate, expressed as a percentage of your initial (at retirement) savings balance. For example, say you retire with a nest egg of $1 million and decide that a 4% withdrawal rate is appropriate for you. This means that you could withdraw $40,000 from your savings in your first year of retirement. And then, if inflation is 2.5% over the next year, you could withdraw $41,000 from your savings the following year.

Retirement age and Social Security benefits are key

waiting to claim Social Security until age 70 could substantially increase your monthly benefits—and give you more time to save and fewer years to live off those savings

All these guidelines depend on a number of factors, and the age at which you retire has a big impact. The average age for retirement is 62,1 which is an important factor2 because that is when you can start claiming Social Security benefits. However, waiting to claim Social Security until age 70 could substantially increase your monthly benefits—and give you more time to save and fewer years to live off those savings. So the age at which you choose to stop working has a big impact on how much income you need from your own savings. This, in turn, affects other rules of thumb like savings rate, savings factors, and sustainable withdrawal rates.

While you may not be able to pinpoint exactly how much income you may need in retirement, you probably have an idea about when you want to retire. If you’re planning to retire early, you may want to use the rules of thumb for age 62. If you are planning to work longer, the rules for age 70 might be more appropriate for you.

We devised a series of guidelines that take into account the important role of retirement age and Social Security. See the following table for a quick summary of how retirement age impacts the other guidelines.

How your retirement age impacts savings and withdrawal in retirement

Things to keep in mind
Our guidelines assume no pension income, and we make a number of other assumptions, including continuous employment, uniform wage growth, and contributions increasing with the wage growth. We acknowledge that individual circumstances are different and may vary through time. That is why we have stress tested these guidelines to be successful in nine out of 10 market conditions across a broad range of investment mixes (see footnotes for methodology and other key assumptions3).

“The important thing to remember is that all these numbers are interconnected,” says Adheesh Sharma, vice president of financial solutions at Fidelity’s Strategic Advisers, Inc. “Looking at them together offers the opportunity to evaluate how one impacts the other.” See the retirement math calculation.

So be sure to check your progress at least yearly. Use our Planning & Retirement Guidance Center to estimate your retirement readiness, and what you can do to improve it. Along the way, and particularly as you get closer to retirement, it’s always a good idea to work with a financial advisor to create a retirement income plan.

In the meantime, use our general rules of thumb to see if you are on track. As a general guideline based on a retirement age of 67, which is the full Social Security benefits age for those born in 1960 or later, aim to:

  • Save enough to cover at least 45% of your preretirement income,4 after accounting for Social Security.
  • Save at least 10 times (10x) your preretirement income.5
  • Save at least 15% of your income6 over your working life. This includes all retirement savings across different accounts plus any employer contributions.
  • Withdraw at most no more than 4.5% of your initial retirement savings7 beginning at age 67. And then keep increasing this withdrawal based on inflation.

Roadmap to retirement

A hypothetical example of our retirement math
Let’s bring these important retirement planning concepts together through a hypothetical example—let’s call her Joanna. Joanna begins working and saving at age 25, and investing her money in an appropriate age-based investment mix that averages at least 50% stocks over her lifetime.

In this hypothetical scenario, her income grows to about $100,000 by the time she retires at 67, which is when full Social Security benefits kick in for those born in 1960 or later.
Joanna has been able to save 10x her preretirement income of $100,000, or $1 million, by age 67. That $1 million in savings is enough to generate 45% of her income in retirement, or $45,000. That’s also a 4.5% sustainable withdrawal rate, giving Joanna a high level of confidence that she won’t run out of money, regardless of market performance.