Poll

What do you think of Fidelity's new retirement milestones?

Old one was just fine
New one is workable
A step in the right direction, but not there yet
They suckzor!

Author Topic: What do you think of Fidelity's new retirement milestones  (Read 6337 times)

JZinCO

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What do you think of Fidelity's new retirement milestones
« on: January 12, 2016, 04:35:45 PM »
Fidelity came out with new guidelines for retirement. Previously, they suggested that you save 1x, 3x, 5x, and 8x of income at ages 35, 45, 55, and 67, respectively. Assumptions are that 15% of salary goes into retirement (3% from employer) from ages 25 to 67, salary climbs at 1.5% real, savings grow at 5.5% (arithmetic or geometric mean, nominal or real, IDK), 50/50 portfolio, and the retiree had earned 70K. Using the 4% rule (not sure what they used), means a withdrawal of $28K ann. Workable with SS, but I think many folks would be disappointed. If only it were that easy.

Now Fidelity says at age 67, you need 10x. Assumptions are similar except a 3% return, retirement lasted for 25 yr, and a withdrawal rate of 4.5% (or $31.5K ann. using our 70k income). They say this plan should lead to more desirable results for a broader income range (50K+).

Using the old rules, I could never get around to how saving just 8x income was workable for the average person. Let's say a household made the median income (call it 55K), so they save $440,000. They'd have to adjust spending from 48K before retirement to 18K using the 4% rule, less taxes. They now say that this 10x plan has a 90% success rate backtested.

I'm happy that now they are very upfront that this means a 45% income replacement rate, and that they are playing it more conservatively now.
As for me, I'll ignoring the retirement guidelines they constantly email me about and keep shooting for 25x expenses by retirement, though I assume a 5% real CAGR.
« Last Edit: January 13, 2016, 08:51:21 AM by JZinCO »

Vilgan

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Re: What do you think of Fidelity's new retirement milestones
« Reply #1 on: January 13, 2016, 08:25:51 AM »
It doesn't hurt that it encourages people to put more money at Fidelity for longer. 8x income or 10x income is still obviously silly since its expenses that matter, but it works well enough as a general model.

edit> Poll options need a "they both suck!" option :P
« Last Edit: January 13, 2016, 08:28:03 AM by Vilgan »

JZinCO

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Re: What do you think of Fidelity's new retirement milestones
« Reply #2 on: January 13, 2016, 08:57:40 AM »
It doesn't hurt that it encourages people to put more money at Fidelity for longer. 8x income or 10x income is still obviously silly since its expenses that matter, but it works well enough as a general model.

edit> Poll options need a "they both suck!" option :P
here here.

nereo

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Re: What do you think of Fidelity's new retirement milestones
« Reply #3 on: January 13, 2016, 09:19:40 AM »
I cross posted here:
http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/retirement-advice-more-poor-advice-from-the-mainstream/?topicseen

Given that I chose to post it under the "antimustachian wall of shame and comedy" you can tell what I think about this latest advice. 

In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.

JZinCO

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Re: What do you think of Fidelity's new retirement milestones
« Reply #4 on: January 13, 2016, 09:29:03 AM »
I cross posted here:
http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/retirement-advice-more-poor-advice-from-the-mainstream/?topicseen

Given that I chose to post it under the "antimustachian wall of shame and comedy" you can tell what I think about this latest advice. 

In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.
Ah, I'll read your thoughts on the post. Yeah, if you think the new guidelines are too dependent on saving at older ages, take a second to look at their old guidelines :)
I'm not sure how they got 3%/yr. Perhaps a prediction, but perhaps more in line with returns of their clients?
It just still boggles my mind that Fidelity's guidelines have become 'gospel' in personal finance sections of major media outlets. For myself, I look at Financial Samurai's because matching his milestones require the ready to commit real effort.
http://www.financialsamurai.com/how-much-savings-should-i-have-accumulated-by-age/

JZinCO

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Re: What do you think of Fidelity's new retirement milestones
« Reply #5 on: January 13, 2016, 09:34:33 AM »
Oh, and to be fair, they do list guidelines for those who want to retire anywhere between 55 and 70. IIRC, to retire at 55 they suggest an ending multiple of 14x.

nereo

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Re: What do you think of Fidelity's new retirement milestones
« Reply #6 on: January 13, 2016, 09:49:30 AM »
Oh, and to be fair, they do list guidelines for those who want to retire anywhere between 55 and 70. IIRC, to retire at 55 they suggest an ending multiple of 14x.
This I understand even less.  If you retire at age 55 they say you only need 14x your salary, but predict market returns of only 3%/year?  Prudence dictates your stach should last at least until age 90 (35 years) yet with such dire predictions for market returns I cannot see how their recommendations would allow for a WR of 4%.  Even using a WR of 4%, that's $30k in income for a worker with a $55k salary, and a 12 year gap between them and SS.
what??

JZinCO

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Re: What do you think of Fidelity's new retirement milestones
« Reply #7 on: January 13, 2016, 10:30:32 AM »
Oh, and to be fair, they do list guidelines for those who want to retire anywhere between 55 and 70. IIRC, to retire at 55 they suggest an ending multiple of 14x.
This I understand even less.  If you retire at age 55 they say you only need 14x your salary, but predict market returns of only 3%/year?  Prudence dictates your stach should last at least until age 90 (35 years) yet with such dire predictions for market returns I cannot see how their recommendations would allow for a WR of 4%.  Even using a WR of 4%, that's $30k in income for a worker with a $55k salary, and a 12 year gap between them and SS.
what??
I have no idea! (correction: 14x for a retirement age of 62).
None of the maths seem to add up!

One Noisy Cat

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Re: What do you think of Fidelity's new retirement milestones
« Reply #8 on: January 13, 2016, 02:13:10 PM »
      The idea of saving relatively little in your 20s strikes me as being particularly bad. You want to get those little green fellows working for you as soon as you can. If there is one thing above all others that I would do differently if I could, it is I would start investing when I was 17 instead of 27.  Second biggest regret actually. First is not seeing Moe Howard in 1974.

     

beltim

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Re: What do you think of Fidelity's new retirement milestones
« Reply #9 on: January 13, 2016, 02:29:24 PM »
In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.

Wait, what?  To get to 1x salary at age 30, that requires saving roughly 10% of your salary each year, assuming you start working at age 21, or perhaps up to 2 years later if market returns outpace salary growth.

nereo

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Re: What do you think of Fidelity's new retirement milestones
« Reply #10 on: January 13, 2016, 03:09:07 PM »
In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.

Wait, what?  To get to 1x salary at age 30, that requires saving roughly 10% of your salary each year, assuming you start working at age 21, or perhaps up to 2 years later if market returns outpace salary growth.

Correct, I suppose I could have been a bit more clear and said "extremely little" instead of "little/nothing". 

beltim

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Re: What do you think of Fidelity's new retirement milestones
« Reply #11 on: January 13, 2016, 03:31:19 PM »
In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.

Wait, what?  To get to 1x salary at age 30, that requires saving roughly 10% of your salary each year, assuming you start working at age 21, or perhaps up to 2 years later if market returns outpace salary growth.

Correct, I suppose I could have been a bit more clear and said "extremely little" instead of "little/nothing".

If a 10% savings rate is "extremely little" that makes 30% "pretty puny" and 50% "little," right?

10% savings for retirement each year over a ~40 year working career, plus Social Security, replaces the vast majority of salary for most people making less than ~2x the median wage.

The reason the old "save 10% of your salary for retirement" rule of thumb was so prevalent is that it works for the vast majority of people.

Keep in mind that these articles are written for people who want to retire at a typical age, not for people on this site.

nereo

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Re: What do you think of Fidelity's new retirement milestones
« Reply #12 on: January 13, 2016, 04:02:49 PM »
In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.

Wait, what?  To get to 1x salary at age 30, that requires saving roughly 10% of your salary each year, assuming you start working at age 21, or perhaps up to 2 years later if market returns outpace salary growth.

Correct, I suppose I could have been a bit more clear and said "extremely little" instead of "little/nothing".

If a 10% savings rate is "extremely little" that makes 30% "pretty puny" and 50% "little," right?

10% savings for retirement each year over a ~40 year working career, plus Social Security, replaces the vast majority of salary for most people making less than ~2x the median wage.

The reason the old "save 10% of your salary for retirement" rule of thumb was so prevalent is that it works for the vast majority of people.

Keep in mind that these articles are written for people who want to retire at a typical age, not for people on this site.
It's 10%, but with a 3% annual return going forward... basically forever.
There seem to be two underlying messages:
1) you only need to save 10% of your income, and that's if you don't start saving anything until after college
2) expect only 3% growth over your lifetime.

I don't agree with either of those messages are good, especially for the 'typical worker'.   Coupled together the message could get even worse.  Suppose someone has been saving 10% from age 21 to 40 but we see the historical 7% returns - that person might conclude "hey, I'm oversaving" or "I don't need to save anything for the next decade!" Take it a bit further out until the person is 55 - they now have 14x earnings.  Is the conclusion "yay, I can retire"?


beltim

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Re: What do you think of Fidelity's new retirement milestones
« Reply #13 on: January 13, 2016, 04:43:44 PM »
10% savings for retirement each year over a ~40 year working career, plus Social Security, replaces the vast majority of salary for most people making less than ~2x the median wage.

The reason the old "save 10% of your salary for retirement" rule of thumb was so prevalent is that it works for the vast majority of people.

Keep in mind that these articles are written for people who want to retire at a typical age, not for people on this site.
It's 10%, but with a 3% annual return going forward... basically forever.
There seem to be two underlying messages:
1) you only need to save 10% of your income, and that's if you don't start saving anything until after college
2) expect only 3% growth over your lifetime.

I don't agree with either of those messages are good, especially for the 'typical worker'.   Coupled together the message could get even worse.  Suppose someone has been saving 10% from age 21 to 40 but we see the historical 7% returns - that person might conclude "hey, I'm oversaving" or "I don't need to save anything for the next decade!" Take it a bit further out until the person is 55 - they now have 14x earnings.  Is the conclusion "yay, I can retire"?

I agree that 3% real is low, even for a 50/50 portfolio, but I don't think it's unreasonable for the next, say, decade or so.  It's just low for a 30-year timeframe.

And 10% is a nice healthy retirement savings rate if you want to retire after a normal career with ~70% income replacement for most incomes.  You can do the math to check this.

franklin w. dixon

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Re: What do you think of Fidelity's new retirement milestones
« Reply #14 on: January 13, 2016, 06:17:50 PM »
In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.

Wait, what?  To get to 1x salary at age 30, that requires saving roughly 10% of your salary each year, assuming you start working at age 21, or perhaps up to 2 years later if market returns outpace salary growth.

Correct, I suppose I could have been a bit more clear and said "extremely little" instead of "little/nothing".

If a 10% savings rate is "extremely little" that makes 30% "pretty puny" and 50% "little," right?

10% savings for retirement each year over a ~40 year working career, plus Social Security, replaces the vast majority of salary for most people making less than ~2x the median wage.

The reason the old "save 10% of your salary for retirement" rule of thumb was so prevalent is that it works for the vast majority of people.

Keep in mind that these articles are written for people who want to retire at a typical age, not for people on this site.
It's 10%, but with a 3% annual return going forward... basically forever.
There seem to be two underlying messages:
1) you only need to save 10% of your income, and that's if you don't start saving anything until after college
2) expect only 3% growth over your lifetime.

I don't agree with either of those messages are good, especially for the 'typical worker'.   Coupled together the message could get even worse.  Suppose someone has been saving 10% from age 21 to 40 but we see the historical 7% returns - that person might conclude "hey, I'm oversaving" or "I don't need to save anything for the next decade!" Take it a bit further out until the person is 55 - they now have 14x earnings.  Is the conclusion "yay, I can retire"?
Yes?

JZinCO

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Re: What do you think of Fidelity's new retirement milestones
« Reply #15 on: January 13, 2016, 06:22:12 PM »
It's 10%, but with a 3% annual return going forward... basically forever.
There seem to be two underlying messages:
1) you only need to save 10% of your income, and that's if you don't start saving anything until after college
2) expect only 3% growth over your lifetime.

I don't agree with either of those messages are good, especially for the 'typical worker'.   Coupled together the message could get even worse.  Suppose someone has been saving 10% from age 21 to 40 but we see the historical 7% returns - that person might conclude "hey, I'm oversaving" or "I don't need to save anything for the next decade!" Take it a bit further out until the person is 55 - they now have 14x earnings.  Is the conclusion "yay, I can retire"?
I'm kind of lost here.
What you've done is probably what most folks using these 'rules of thumb' do. Conflate them. Then folks get confused and tune out without developing a plan.

And 10% is a nice healthy retirement savings rate if you want to retire after a normal career with ~70% income replacement for most incomes.  You can do the math to check this.
Yeah, that's not Fidelity's math though, just saying. They say save 15%, expect 3% return and get an income replacement of 45%.
I'm not saying your math is wrong, just that I think beltim and nereo are mixing different retirement "plans". (Struck out the last part because we are working with percentages here so income level is a non factor).

In short; they recommend saving little/nothing in your first decade of adulthood, saving just 10% of your income from your 30s-50s (for the average worker) and assume a person will both want and be able  to work until age 67.  Their assumptions about future market returns (3%/year) are extraordinarily bearish.

Wait, what?  To get to 1x salary at age 30, that requires saving roughly 10% of your salary each year, assuming you start working at age 21, or perhaps up to 2 years later if market returns outpace salary growth.
Also wanted to point out Beltim had a point earlier. Let's say your income is X and you save from 25 to 30 (Fidelity's inputs). To reach 1x by 30, one needs to save 15% and have 3% growth. That math works out to be 0.994x of one's income at the end of age 30.
Unlike Fidelity's old rules, they are now redistributing the onus of saving onto younger ages.

EDIT:
I've now come to the conclusion that Fidelity is now really giving a kick in the pants to younger folks (compared to the old rules) and THAT is a great thing. Let's say that their 3% return really is pessimistic and we get a 5% real return instead (what I consider to be conservative given my AA). Someone following their rules at age 25 would actually end up saving 20x their income. Based on my planned retirement expenses, that actually gets me EXACTLY where I want to be.
« Last Edit: January 13, 2016, 06:30:28 PM by JZinCO »

beltim

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Re: What do you think of Fidelity's new retirement milestones
« Reply #16 on: January 13, 2016, 07:21:42 PM »
And 10% is a nice healthy retirement savings rate if you want to retire after a normal career with ~70% income replacement for most incomes.  You can do the math to check this.
Yeah, that's not Fidelity's math though, just saying. They say save 15%, expect 3% return and get an income replacement of 45%.
I'm not saying your math is wrong, just that I think beltim and nereo are mixing different retirement "plans". (Struck out the last part because we are working with percentages here so income level is a non factor).

I was including Social Security in my 70% income replacement.