Rewinding Fidelity's 10X retirement rule to 55, 50, and 45.

[Retireatee1]

Hey gang,

I've been looking into Fidelity's 10X rule for retirement.

https://www.fidelity.com/viewpoints/retirement/how-much-do-i-need-to-retire

It's arguably a decent yardstick to use for those with zero patience for building complete financial models.  That said, I like building complete financial models.  First, here are some of the assumptions to their rule:

1) It assumes retirement at age 67
2) It assumes expenses are somewhere around 80% of pre-retirement income.
3) It assumes Social Security retirement insurance benefits are part of the equation

Fidelity also provides the targets for 70 (8X) and 65 (12X). but no other ages.  So how can I arrive at those targets?  What about 55, 50, and 45?  I built a simulation using the 2022 Retireator release (attached).  My first goal was to create a "Joe Sixpack' simulation which hits the 10X milestone at age 67.  Joe is currently 30 and makes a median $42,000 per year.  He has the 1X in a 401k and will have 10X at age 67 (planning to age 95).  He contributes 10% of his income to retirement and gets a 3% employer match.  He will take Social Security at age 67.  He just took out a mortgage on a house in Florida worth a median $290,000.  He spends most of his take-home pay in the current year.  His retirement spending is a little over 80% of his pre-retirement income, and his income from savings represents 45% of his retirement income (a withdrawal of 3.8% of the total balance the first year).  This model aligns with the various rules of thumb and is as unremarkable as possible.  I did have to set inflation and rate of return very conservatively to get it to balance out.  So, using this as a baseline, I can explore retirement at other ages.  First, I tested the 70 and 65 ages and get the same results as Fidelity.  So how do the other three ages fare?  Here are the results:

Age	Multiplier
60	15X
55	19X
50	23X
45	27X

So, there you have it.  This is just a possibility, but I thought it helpful.

[ixtap]

I am never going to have 27x our current household income. The thing about successfully retiring early is that you were obviously able to live on less than 80% of your income while working, so you don't need that much in retirement, either. Unless, you had a windfall, then the rules are harder to follow. That's why changing the equation completely so that X = expenses, rather than salary, is so common when people actually want to think about their finances (aka build more complete financial models).

Neill Wolfe, with Wells Fargo Advisors has also proposed a formula that is a multiple of your home's value, which still seems more appropriate than salary.

[Retireatee1]

I am never going to have 27x our current household income. The thing about successfully retiring early is that you were obviously able to live on less than 80% of your income while working, so you don't need that much in retirement, either. Unless, you had a windfall, then the rules are harder to follow. That's why changing the equation completely so that X = expenses, rather than salary, is so common when people actually want to think about their finances (aka build more complete financial models).

Neill Wolfe, with Wells Fargo Advisors has also proposed a formula that is a multiple of your home's value, which still seems more appropriate than salary.

I had an inaccuracy there that I corrected; Joe's retirement expenses actually go up slightly at his retirement age due mostly to health care and travel.  His expenses are never above 80% of pre-retirement gross income.

27X is likely too high for higher-earning FIRE types and I do agree you should focus on expenses and not income.  But it's reasonable if you make $42,000 / year.  I've clearly stated the assumptions here and it's not a one-size-fits-all situation.

[Retireatee1]

There's an interesting detail with the Joe simulation when retiring at 67.   What happens if Joe, instead of deducting the 10% into a 401k, pays tax on it and invests it in a brokerage account?  This will then incur additional taxes on the gains (a mix of ordinary income taxes and the capital gains rate).  The answer is that it pushes his retirement date out a little over 2 months.  So, the tax advantaged nature of the 401k has a benefit, but in Joe's "median American" case it is really very limited.  Some may find this surprising.

EDIT: Funding a Roth IRA did a little better and pulled it in almost 5 months as compared to the brokerage account.

[Ron Scott]

Guessing about future returns and inflation is just that.

[moof]

All income based rules of thumb are just dumb.  Why?  Let’s say you get a big 50%raise the last year before retiring.  These rules of thumb would say “Sorry sucker, you need to wait until you save 50% more”.  Sane folks would realize that if you maintain flat spending the extra money will help, not hurt.

These rules of thumb are for entrainment only.

We had a retirement guy come into the office at HR’s request, with an audience full of engineers.  He plastered up a slide with “Checkpoint” targets with these sort of multipliers.  It was horrifying to see how many older engineers were clueless about retirement, and entertaining for those of us with a clue to tear apart the flimsy guidance.

[RedmondStash]

A formula based on income instead of spending tells me that whoever created the formula doesn't really know what they're doing.

Income isn't what matters. Spending -- both current and anticipated future -- is what matters in terms of figuring out how much you need to save to FIRE.

It's hard to get much simpler than the 4% rule, which is basically 25x current spending. Not an easy target to reach, and no guarantee of success -- plus you might be fine with less, if you're lucky with sequence of returns -- but a useful guidepost.

[Ron Scott]

It's hard to get much simpler than the 4% rule, which is basically 25x current spending. Not an easy target to reach, and no guarantee of success -- plus you might be fine with less, if you're lucky with sequence of returns -- but a useful guidepost.

It’s good for a 30-year retirement if you have significant cut-back flexibility and possibly for longer if working is a realistic fall-back option.

[ixtap]

A formula based on income instead of spending tells me that whoever created the formula doesn't really know what they're doing.

They do know what they are doing: that is, they know their audience and we are not in it. The salary based formulas were created by financial advisors tired of asking "Well, how much do you want to spend in retirement?" and having clients respond "I don't even know how much I spend now!"

[FIRE Artist]

A formula based on income instead of spending tells me that whoever created the formula doesn't really know what they're doing.

They do know what they are doing: that is, they know their audience and we are not in it. The salary based formulas were created by financial advisors tired of asking "Well, how much do you want to spend in retirement?" and having clients respond "I don't even know how much I spend now!"

This is the truth of it.  And most people spend more than they earn, hence the existence of consumer debt.

[Retireatee1]

A formula based on income instead of spending tells me that whoever created the formula doesn't really know what they're doing.

They do know what they are doing: that is, they know their audience and we are not in it. The salary based formulas were created by financial advisors tired of asking "Well, how much do you want to spend in retirement?" and having clients respond "I don't even know how much I spend now!"

This is the truth of it.  And most people spend more than they earn, hence the existence of consumer debt.

Well, this is an effort to Mustachify this rule of thumb and I'm not done.  So now that I've filled in more of the lower FIRE retirement ages, the next step is to calculate the Fidelity Factor to determine your pretend income.  This is 1.20, which is annual expenses scaled up based on that 80% with a little extra to cover retirement income taxes.  So, multiply your annual expenses by 1.20 to get your pretend income and multiply that by the extrapolated Fidelity multipliers above based on your retirement age.  This is the Fidelity-FIRE adaptation.