Does Fidelity’s 45% Rule Still Hold Up?

Financial services giant Fidelity has a rule for retirement savings you may have heard of: Have 10 times your annual salary saved for retirement by age 67. This oft-cited guideline can help you identify a retirement savings goal, but it doesn’t fully account for how much of those savings will cover in retirement.

Enter Fidelity’s 45% rule, which states that your retirement savings should generate about 45% of your pretax, pre-retirement income each year, with Social Security benefits covering the rest of your spending needs.

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The financial services firm analyzed spending data for working people between 50 and 65 years old and found that most retirees need to replace between 55% and 80% of their pre-retirement income in order to preserve their current lifestyle. Because retirees have lower day-to-day expenses and don’t typically contribute to retirement accounts, their income requirements are lower than people who are still working.

As a result, a retiree who was earning $100,000 a year would need between $55,000 and $80,000 per year in Social Security benefits and savings withdrawals (including pension benefits) to continue their current lifestyle.

Fidelity’s 45% guideline dictates that a retiree’s nest egg should be large enough to replace 45% of their pre-retirement, pretax income each year. Following this rule, the same retiree who was earning $100,000 per year would need enough saved up to spend $45,000 a year, in addition to his Social Security benefits, to fund his lifestyle. Assuming the person lives another 25 years after reaching retirement age, this person would need $1.125 million in savings.

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