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What's your retirement rule of thumb?

February 3rd, 2015 at 10:40 pm

I haven't even been really allowing myself to think about retirement funding in the past year, since I've been so focused on house stuff. Now, with perhaps the end of our major money woes in sight (if a few more things fall into place in the next month or two), I started looking around at where we should be.

I've used calculators that seem to say we're doing OK, so I think this rule of thumb may be for a more lavish lifestyle than I'm imagining, but I was interested in the "8x your annual income" rule of thumb. Fidelity laid it out like this: have 1x your income by 35, 3x by 45, 5x by 55 and 8x by 67.

Since that doesn't help me totally, being 40 right now, I broke it down further:
1x by 35
2x by 40
3x by 45
4x by 50
5x by 55
6x by 59
7x by 63
8x by 67

Ours is a bit confusing because AS is 35, I'm 40 and NT is 41. And we don't think of our retirement as separate assets. So I decided to figure each one separately, add them together, and see how far off our total retirement assets are.

AS might make $60K this year, so for her I put $60K
NT's at $57K now, so I put him at $114K
I'm at $65K, so I put myself down for $130K

That totals $304,000 we should have in retirement funds right now. Currently we have $230,639, which is $73,361 short.

(If we'd stayed at our last year's salaries, our goal would be $251K, or only $20,361 short. So we weren't TOO far off the mark, but now that we have higher salaries the discrepancy is much greater.)

I think it's a neat number to aim for, especially since it's a stretch (and stretching is good when it comes to financial goals because it keeps me motivated), but I wonder how realistic it is for what we might need.

Thoughts?

8 Responses to “What's your retirement rule of thumb?”

  1. Another Reader Says:
    1423014388

    Have a look at the 4 percent safe withdrawal rate. Lots of good threads on the subject at early-retirement.org and Mr. Money Mustache as well as on the Bogleheads site. If you need $40,000 in retirement, including taxes, in addition to any pensions and social security to avoid eating cat food and living under a bridge, then you need 25 times that amount in savings and investments. That's $1MM.

    I don't know where Fidelity gets 8 times your salary. They must be considering pensions and social security in addition to your savings in their calculations. If you have a $100k salary at retirement, 8 times that is $800,000. The amount you can safely withdraw for a 30 year retirement and be reasonably sure of not going broke is $32,000. Yes, some expenses will go down in retirement, but a 68 percent drop in income will not work for most folks.

  2. FrugalTexan75 Says:
    1423020565

    I would put mine at x20. If I retire at 55, then I need 10 years of $25k until I claim SS. Once I have SS, then my savings only has to make up the difference between whatever I get from SS and my expenses. So ... that would be about $500k I'd want. I'm a bit less than 2/5 there at 39. Of course, I don't think I will fully "retire" at 55 - probably will find some kind of income gigs (maybe writing books Smile ) so I might be able to get away with less than 500k. Big Grin This of course only really works if I'm single. Married might make it a different story (can't control expenses so much, but possibly Other Half would have better income)

  3. chloe Says:
    1423023568

    I do check in with this 8x salary rule of thumb. But I also check in with the 25x expenses rule as well. I figure if we're meeting all the different rules of thumb then we should be in good shape, right? Smile
    I think the idea with the 8x salary is that as your salary increases over time, your retirement goals should increase, too. So that if you start making more money, you should adjust your retirement savings accordingly?

    I am 35 and my DH is 33, so I checked to see if I met the 1x rule on my 35th birthday, and I did. Then, when I turn 36 and he turns 34, we will average 35, so I will check to see if together we meet the 1x rule (we are on track to do so.) Then when he turns 35, I will check to see if he meets it individually. He probably won't, based on my projections, but he'll be close and together we should be okay. I just like to look at lots of different metrics to see how we're doing (love the numbers!)

  4. ceejay74 Says:
    1423032966

    Thanks everyone! Interestingly, if I do 25x expenses not counting a very conservative Social Security estimation, I come up with $1.5 million, and if I do a very conservative estimate of what 8x our current income would be I get $1.6 million.

    Does the 25x expenses assume that you'll live 25 years and never experience any inflation? If so, it seems like the number I got is unrealistic, because when I'm in retirement money will have inflated quite a bit, and will continue to do so as I live in retirement. Or maybe it assumes you'll continue to grow your retirement nest egg since you're only withdrawing a bit at a time...?

  5. VS_ozgirl Says:
    1423035461

    I like the 8x rule, it makes it easier to aim for than assuming 4%pa (4% of my current retirement account is depressing! And it's hard to judge what you would need 30 yrs in the future).. But I'm 36 and can see I have 1x my annual income. 2x my annual income at 40 will be hard but then I will not have a mortgage so perhaps don't need the income I earn now. Especially as it is comfortable for me? This is a good yardstick

  6. snafu Says:
    1423037771

    I've kept it simple all these years, 17% of income or the maximum allowable for our earning. I watch allocation and how the funds appreciate. The past 2 years have been remarkable.

  7. LivingAlmostLarge Says:
    1423067432

    It's probably close to what you need using the 8x rule of thumb.

  8. Another Reader Says:
    1423104830

    It's 25x your expenses at retirement, not today's expenses. If you plan to retire in 25 years, you estimate inflation and increase your expenses over the 25 years by your assumed inflation rate. The idea is that between your savings and investment growth, your investments will grow to the point you can withdraw four percent of the total in the first year and index that amount up for inflation thereafter. The most common mathematical model uses multiple simulations based on the history of the markets to see if you would be able to survive a 30 year retirement with the proposed withdrawals without running out of money.

    Some of your expenses will decrease or disappear entirely by the time you retire. For example, your mortgage may be paid off. You will need less income if part of that income does not go to the mortgage. The kids will be finished with school and out of the house in 25 years. Another set of expenses not to include. However, you may travel more or have higher medical expenses. You adjust for those as well.

    The quote from the Fidelity article is:

    "To simplify matters, we’ve created a rule of thumb: Save at least 8 times (X) your ending salary to help increase the odds that you won’t outlive your savings during 25 years in retirement."

    If you think after 25 years of inflation, your average ending salary would be $150k with a total for all three of you of $450,000, you would need to have $3.6MM in savings and investments. Impossible? If you start early and let the power of compounding work its magic, it's doable. At your ages, you need to buckle down and max out all your retirement accounts.

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