New retirement savings advice from Fidelity Investments is more realistic than what's been promoted in the past. But is it realistic?
According to Fidelity, someone retiring at age 67 – the full retirement age for those born in 1960 or later – should have savings equal to eight times their final salary in order to maintain their lifestyle through an estimated life expectancy of 92. So a person making $50,000 needs $400,000 in savings that presumably would be supplemented by Social Security to get a combined income equal to about 85 percent of their pre-retirement salary.
That sounds about right; taking the often recommended 4-5 percent per year from savings plus Social Security should get them there.
This is quite a contrast to ads that have people carting their million-dollar "numbers" around the neighborhood. It's also helpful that Fidelity lays out something of a timeline for saving, suggesting the goal by age 35 is one times salary, by 40 it's two times and so on. A big number can be less intimidating when it's broken down like that.
This is an ideal, of course, and the experience of Fidelity's own customer base raises the question how many people will reach the goal. The mutual fund company said its 12 million retirement account holders had an average balance of $73,000 at the end of June, so it sounds like they have some catching up to do.
While the advice is sound and the goal refreshingly modest after decades of scare tactics from investment houses, achieving it will be a challenge for investors made skittish by stock markets that plummet one year and soar the next. Anyone scared off by the roller coaster ride is being punished by the current miniscule interest rates on savings, a consequence of the Fed's commitment to keep borrowing costs down to stimulate the economy. That hasn't worked very well, while devastating CD yields and other conservative instruments favored by the retired and near-retired.
Fidelity acknowledges the difficulty of making money on investments by lowering projected annual portfolio growth to 5.5 percent, a far cry from the 8-10 percent touted a decade ago. But it also assumes this theoretical saver's employer provides a 3 percent 401(k) match to go along with the suggested personal savings of 12 percent of earnings through most of his or her career.
That's the best of possible worlds; according to a recent report fewer than half of American private sector workers have a 401(k) plan at work and even those that do typically contribute far less than these recommendations.
And it's pretty tough to save when you're raising a family that is bombarded by messages to buy, buy, buy and not just from advertisers; some economists proclaim that more consumer spending will make us all richer.
I'm no financial planner, but if I was I'd talk as much about outgo as income. Delaying or avoiding unnecessary purchases and diverting the money into savings pays dividends later, and if thrifty habits carry over into retirement that "number" can be coaxed within easier reach.
Ron Bartizek, Times Leader business editor, may be reached at [email protected] or 570-970-7157.