What Will My Savings Cover In Retirement?

Clients should plan on savings providing 45% of pretax, preretirement income

Have you ever found yourself lost when visiting a new place? Then you know how hard it can be to find something when you don’t know where you are going. The same applies to saving for retirement—until you know the goal, it is hard to figure out if you are on the right path. To simplify matters, Fidelity analyzed extensive spending data and found that most people needed to replace between 55% and 80% of their pretax, preretirement income after they stopped working to maintain their lifestyle in retirement.¹

Why the drop? Well, you likely won’t be making contributions to retirement savings plans. And not working means potentially lower taxes, less need for certain forms of life insurance, and lower day-to-day expenses. After all, you don’t need to pay for work clothes or commuting costs. You may also decide to pay off your mortgage.

Key takeaways

• Plan for your retirement savings to generate about 45% of your pretax, preretirement, income, with the rest coming from Social Security.
• The proportion of your preretirement expenses you’ll need to cover in retirement, and how much of that will need to come from savings, may vary based on a variety of factors, including your retirement age, anticipated lifestyle in retirement, and current income.
• The higher your income, the higher the proportion of preretirement income you’ll need to replace from personal savings.
  Where will my retirement income come from?Where will the money come from? The good news is that not all of it needs to come from savings. Social Security will likely cover some of your spending needs—relatively more for lower income earners than those who earned higher incomes (see graph below).

After that, Fidelity research finds that those with between $50,000 and $300,000 in annual income currently should plan for their savings (including pensions) to replace about 45% of their pretax, preretirement income.² The exact amount, of course, may vary depending on your income, retirement age, and other factors.³

How much you earn matters

Your salary plays a big role in determining what percentage of your income you will need to replace in retirement. People with higher incomes tend to spend a small portion of their income during their working years, and that means a lower income replacement goal in percentage terms to maintain their lifestyle in retirement.

As you can see in the chart below, someone who makes $50,000 might expect to need to replace around 80% of their pretax, preretirement income in retirement to maintain their standard of living, while someone who earns $200,000 might aim to replace closer to 60%.

Based on Consumer Expenditure Survey (BLS), Statistics of Income Tax Stat, IRS tax brackets and Social Security Benefit Calculators; local and state taxes not included; retirement age 67 for base case. Source: Fidelity Investments.
Social Security covers less for higher earners

For many people, a significant portion of retirement income comes from Social Security, but that share is relatively higher for lower-income people. As you can see in the chart above, a person earning $50,000 a year could expect Social Security to replace about 35% of income, or $17,500, with the rest coming from savings. Someone who made $200,000 each year might expect to get 16% of that income from Social Security, or $32,000. If you made $300,000, only 11%, or $33,000, would likely come from Social Security.

When you retire matters

Based on Consumer Expenditure Survey (BLS), Statistics of Income Tax Stat, IRS tax brackets and Social Security Benefit Calculators; local and state taxes not included; retirement age 67 for base case. Source: Fidelity Investments.
The age at which you stop working is another big factor in how much of your preretirement income you will need your savings to replace in retirement. Most people are eligible to receive Social Security benefits as early as age 62, but those benefits increase if you wait until your full retirement age (usually 67), and rise even more if you delay until age 70.

The earlier you retire, the more you will have to rely on savings to meet your income needs, because your Social Security payments will be lower (see chart). Let’s consider Bill, who plans to claim his Social Security benefits as soon as he retires. Bill needs to replace 45% of his income from savings if he retires at age 67. If he stops working at 62, that number would go up to 55%. But it drops to 40% if he stays in the workforce until age 70. Delaying retirement gives you more time to save and higher Social Security benefits.

1. Fidelity analyzed the household consumption data for working individuals age 50 to 65 from Consumer Expenditure Survey, US Bureau of Labor Statistics. The average income replacement target of 45% is based on the objective of maintaining a similar lifestyle to before retirement. This target is defined at 35% for “below average” lifestyle and 55% of preretirement income for “above average” lifestyle. Therefore, the final income multiplier target of 10x final (preretirement) income associated with the default “average lifestyle” (maintaining preretirement lifestyle in retirement) and a default retirement age=67, goes down to 8x for ‘below average’ lifestyle and increases to 12x for ‘above average’ lifestyle. See footnote 3 for investment growth assumptions.

2. Assumes a single-income household retiring and claiming Social Security retirement benefits at age 67.

3. Fidelity has developed a series of income multiplier targets corresponding to different ages, assuming a retirement age of 67, a 15% savings rate, a 1.5% constant real wage growth, a planning age through 93, and an income replacement target of 45% of preretirement income (assumes no pension income). The final income multiplier is calculated to be 10x your preretirement income and assumes a retirement age of 67. The income replacement target is based on Consumer Expenditure Survey (BLS), Statistics of Income Tax Stat, IRS tax brackets and Social Security Benefit Calculators. The 45% income replacement target (excluding Social Security and assuming no pension income) from retirement savings was found to be fairly consistent across a salary range of $50,000-$300,000, therefore this factor may have limited applicability if your income is outside that range. The 45% income replacement target assumes a retirement and Social Security claiming age of 67, which is the full Social Security benefit age for those born in 1960 or later. For an earlier retirement and claiming age, this target goes up due to lower Social Security retirement benefits. Similarly, the target goes down for a later retirement age. For a retirement age of 65, this target is defined as 50% of preretirement annual income, and for a retirement age of 70, this target is defined as 40% of preretirement income. As the income multiplier target is based on income replacement target and retirement age, for an earlier retirement age, this target goes up due to lower social security retirement benefits and a longer retirement horizon. Similarly, the target goes down for a later retirement age. For a retirement age of 65, this target is defined as 12x and for a retirement age of 70, this target is defined as 8x.