The Fidelity saving guidelines provide rules of thumb or simple guidelines that you can use to discover more about retirement. Each rule of thumb will help you understand and answer four commonly asked questions about retirement.
This article brings it all together to show you how the rules of thumb work collectively to help you understand more about, and develop your own ideas to manage your retirement journey. They rules of thumb are all interconnected, so it is important to keep each in mind, and to understand how they work together, as you save for your retirement and monitor your progress.
The figures quoted in these tools use generic assumptions and estimations designed to give some simple rules of thumb to help you look into your retirement savings journey and beyond. The figures are not personalised to you. They are based on average household incomes in the UK with typically two working adults and two state pensions. The assumptions we use may not represent what actually happens in the future - because no-one knows that. The tools should, therefore, not be used as a detailed retirement plan or act as a replacement for professional advice.
Read more about our assumptions here.
Everyone’s retirement savings plan is different. However, there are common and reoccurring questions about retirement and they usually begin with: “How much do I need to have saved to retire?”
No one knows the exact answer in advance as you don’t know what life, or the markets, will bring. However, you do need to have some understanding so that you can plan and make decisions along the way. That’s where our rules of thumb can help. Our research has identified four rules of thumb and each of them can be useful in understanding and making a plan for your retirement.
How much do I need to retire?
Seven is a powerful number in lots of areas of life and many cultures all around the world, believe it is a lucky number. We have seven days of the week, there are seven colours in a rainbow, seven Wonders of the World and so on. Seven is quite a magnificent number.
This is good news for you, and for us, as we have discovered that seven is also a powerful number in retirement savings. Our research shows that workers in the UK who save 7 x their annual household income by the age of 68 should be able to retire without any material reduction in their standard of living. The power of seven is therefore the key to a retirement that you choose.
Knowing that seven is key to a successful retirement is one thing, however how do you know how to get there?
Our milestone rules of thumb will help you meet the goal of 7. As can be seen below in the graphic, we recommend that you should try and save at least one times your annual household income by the time your reach 30, two times your annual household income by the time you reach 40, four times your annual household income by the time you are 50, six times your annual household income by the time you are 60 and then seven times your annual household income by the time you retire, assuming you retire at age 68.
How much should I save each year for retirement?
If you save for retirement from age 25 to age 68 we suggest that you aim to save at least 13% of your household annual income, before tax each year to make sure that you have enough income to maintain your lifestyle in retirement.
13% includes all household retirement savings across different accounts and it doesn’t all need to come from your savings. If you have a workplace pension, any employer match or profit sharing contributions count towards your annual savings.
13% isn’t fixed, it is a rule of thumb and there are always ways to catch up along the way. Whether it is enough or too much depends, on the choices you make before retirement, most importantly, when you start saving, how you invest, when you retire, and how you want to live in retirement.
How can I make my retirement savings last?
Once you reach your household retirement savings goal, it is time to start spending. One of the most challenging questions about retirement is how much should you withdraw from your retirement savings to make sure that your savings last. If you withdraw too much, you risk running out of money however, if you withdraw too little each year, you may not be able live the life you want to in retirement. Our guideline is to limit withdrawals to no more than 5% of your initial retirement savings, and assume that the withdrawal amount will increase annually at the rate of inflation.
Will my retirement savings cover my retirement?
Our research* shows that most people need to replace between 55% and 85% of their, pre-retirement household income before tax, after they stop working, so that they can maintain their lifestyle in retirement. This is because in retirement, you are not likely to be spending as much money. For example you may not continue to make contributions to retirement savings plans, your taxes could be lower, there will be less need for certain forms of life insurance and you will likely have lower day-to-day expenses. You may also decide to pay off your mortgage.
Of this 55% - 85%, not all of it needs to come from your household retirement savings because both your State Pensions will cover some of your spending needs. How much should you assume will come from retirement savings? Our rule of thumb is that your household retirement savings should cover about 35% of your pre-retirement annual household income before tax, with the rest coming from your State Pensions.
Other important considerations that will impact this figure are your retirement age, your anticipated spend in retirement and your annual household income at retirement. We discuss the impact of these on the rules of thumb in more detail in our retirement savings articles and in our retirement planning tool.
For more information about our assumptions behind the rules of thumb, please click here.
* Fidelity International's Retirement Savings Guidelines white paper. November 2018