The Covid-19 pandemic-related impacts on our lives are creating anxiety in a lot of ways. Many of my clients are conducting financial reviews to help get an up to date picture of their financial plans especially as it relates to retirement savings.
This isn’t a fun activity at the best of times and it’s even less attractive when you suspect that you’re falling behind.
My message to you is that ‘Knowledge is Power’…. you are much better off knowing where you stand relative to your goals vs. living in the dark (this is a major source of anxiety BTW).
At Brown Financial, we work hard to understand how our clients want to live in retirement and then collaboratively build and implement plans to make those dreams a reality.
So, where should you start?
I like using ‘rules of thumb’ to give per- spective on big, complex things like retire- ment planning. I recently read an article from my friends at Fidelity Investments that uses age-based ‘factors’ to indicate how well your savings plan is progressing. Here’s a summary of the article (note that this is a US-based article so some of the inputs are different here in Canada, but the concepts are the same).
Fidelity’s rule of thumb:
SAVE 10X YOUR INCOME BY AGE 67.
Key takeaways
• Aim to have savings of at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.
• Inputs that will impact your personal savings goal include the age you plan to retire and the lifestyle you hope to have in retirement.
• If you’re behind, there are ways to catch up. The key is to take action.
Fidelity’s savings factors are based on the assumption that a person saves 15% of their income annually beginning at age 25, invests more than 50% on average of their savings in stocks over their lifetime, retires at age 67, and plans to maintain their pre-retirement lifestyle in retirement.
Based on those assumptions, we estimate that saving 10x (times) your pre-retirement income by age 67, together with other steps, should help ensure that you have enough income to maintain your current lifestyle in retirement. That 10x goal may seem ambitious. But you have many years to get there.
Of course, everyone’s retirement dreams and needs are different, so you need to create a plan that is based on your own inputs. Here are the two most important inputs:
1 / WHEN DO YOU PLAN TO RETIRE? The later you start retirement, the less you need to save and this reduces your ‘factors’.
2 / WHAT KIND OF LIFESTYLE DO YOU WANT IN RETIREMENT?
The more you plan to spend, the more you need to save and this increases your ‘factors’.
What if you’re behind?
If you’re under age 40, the simple answer is to save more and invest for growth through a diversified investment mix… If you’re over 40, the answer may be a combination of increased savings, reduced spending, and working longer, if possible.
No matter what your age, focus on the goals ahead. Don’t be discouraged if you aren’t at your nearest milestone—there are ways to catch up to future milestones through planning and saving. The key is to get an understanding of your own situation, take action, and the earlier the better.
