Daily Traders Edge

Fidelity: 4 Major Rules To Keep Retirement On Track

February 07
10:15 2019

Perhaps the most daunting financial challenge most people face is estimating how much money they will need in retirement. It’s a difficult task because there are so many moving parts and unknowable variables — from estimating how long you will live to forecasting how much your investments will yield.

Fidelity Investments recently explained four key savings rules of thumb that can help provide a feel for whether you’re on track. The company evaluated these guidelines for the U.S. and five foreign locales to provide comparative context and encourage successful savings habits across international boundaries.

In a lot of areas, Americans’ financial literacy is much higher than it is in other nations, said Mark Sullivan, head of Fidelity’s international benefits consulting group in London. Part of the rationale behind the report was to “take the best practices of the U.S. and deploy them internationally,” he said.

But even in the U.S., many people aren’t practicing these four guidelines and might not even be familiar with some of them:

1. How much to save each year

Fidelity’s first rule of thumb is to try saving at least 15 percent of your gross income, preferably over your entire career. If you earn around $50,000 a year, not far from the U.S. median income, you would want to sock away $7,500 annually.

This amount can include employer matching funds if you participate in a 401(k)-style retirement plan at work, Sullivan said in an interview.

A 15-percent savings goal would represent a stretch for a lot of Americans. Savers in 401(k) plans managed by Fidelity currently sock away 13.2 percent on average — 8.7 percent by participants themselves and 4.5 percent chipped in by employers.

People lacking retirement coverage at work — nearly half the employed population — usually save much less. Workers can save on their own, using Individual Retirement Accounts and other vehicles, but most don’t on a comparable scale.

Fidelity’s recommendation of a 15-percent goal for Americans is near the middle of the pack as a global comparison. Fidelity encourages workers in Germany to save 21 percent and Hong Kong residents to save 20 percent.

In Hong Kong, for instance, longer life expectancy and earlier retirement ages make it critical for workers there to save more than in the U.S., Sullivan said. Other key factors that vary across borders include investment returns available in local markets and the generosity (or lack thereof) of government pensions.

Suggested savings rates for the three other nations evaluated by Fidelity are: 16 percent in Canada and Japan and 13 percent in Great Britain.

2. Savings as a multiple of salary

Another way to approach retirement planning is by calculating the total amount of money you might need to save.

Rather than pick a number out of the blue, Fidelity recommends that Americans strive to accumulate at least 10 times their final yearly salary. Someone who earned $50,000 in that final year of full-time work would want at least $500,000 saved by the time they retired, presumably around age 67. Younger retirees would need higher amounts.

Housing equity counts toward this 10-times savings figure, making it more attainable for people who own homes. Homeownership is less common in places like Hong Kong, which explains why Fidelity suggests people there save a hefty 12 times their final salary, Sullivan said.

Continue Reading at USA Today

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