How much do you need to retire?

How much money do you need to save for retirement? It’s a simple enough question. But the answer is complicated because there are so many variables—some known, others impossible to pin down—that can shape the answer, sometimes dramatically.

Still, planning for any goal as big and far away as retirement requires some working assumptions—and an understanding of how they may impact potential outcomes. When will you start saving, for example? How much can you save every year? When will you retire? And what will your investments return? The answers to these and other key questions will impact the odds of reaching your retirement savings goals.

To simplify matters, we’ve created a rule of thumb: Save at least 8 times (X) your ending salary to help increase the odds that you won’t outlive your savings during 25 years in retirement. If that multiple seems daunting, don’t fret. You don’t need to save 8X from the start. Rather, you can step up to it over your working life.

For example, by age 35, Fidelity suggests that you should have saved 1X your current salary, then 3X by 45, and 5X by 55. “Setting up clear goals linked to your salary can help simplify your planning, and help you determine if you are on track throughout your working life,” says Fidelity Executive Vice President John Sweeney. “Having such guideposts is particularly important in today’s workplace, where layoffs, job switching, longer life expectancy, and escalating health care costs can complicate your efforts to save for retirement.”

Of course, your life might not fit neatly into such a precise formula. Start saving earlier, save more, retire later, spend less in retirement, or generate higher investment returns, and your projected savings factor will go down. Do the opposite, and the savings factor you need will go up. “A rule of thumb can prove valuable,” says Sweeney. “However, it’s important to consider your particular situation, and adjust accordingly.”

To help you get a handle on how key choices can impact your retirement savings, Viewpoints has created the interactive below, which estimates how seven critical variables, considered individually, can impact how much you may need to save for retirement.

How did we get to 8X?

We got to 8X by starting with a hypothetical worker with average income and a willingness to save and invest. From there, we evaluated what salary multiple of her ending salary she would need at retirement to cover her estimated retirement expenses.

Let’s call our hypothetical worker Lily. We assume she starts saving at age 25, retires at 67, and lives until 92. Lily’s salary grows from $40,000 at 25 to $73,640 at retirement (with no breaks in employment). She defers 6% of her salary at 25, escalating to 12% within six years. She receives a 3% company match and takes no loans or withdrawals. We assume her investments grow at 5.5% a year (3.2% after assumed inflation of 2.3%). When she retires at 67, we assume she will spend 85% of her ending salary after taxes (tax rates stay the same), and get $1,918 a month in Social Security income.

Based on these assumptions, Lily would need to save $577,000 by age 67, or almost 8X her ending salary. This is the savings amount needed to cover $51,636 a year in spending, which is her total estimated annual expense, in today’s dollars, assuming an 85% income replacement and subtracting Lily’s estimated tax obligation, over 25 years in retirement.1 In this hypothetical, she would actually have saved $639,236 by age 67, more than her 8X goal, giving her a financial cushion for her retirement.

What’s your savings factor?

So how can the choices you make alter your readiness to retire?

We start with four variables over which most people have considerable control: when you start saving for retirement; your target retirement date; the percentage of your salary you defer into a 401(k), 403(b), governmental 457(b), or other retirement savings plan; and how much of your ending salary you may need in retirement (your replacement goal). Then we look at three variables over which you have less control: your rate of return,2 your salary growth, and how long you will live.

One: Starting age

The earlier you start saving for retirement, the better. Can you wait to save until you’re 30 instead of 25? Probably, but the longer you delay, the harder it will be to reach your retirement savings goal. To catch up, you may have to allocate a bigger portion of your salary to retirement saving, or even delay retirement.

Let’s say Lily starts saving at age 30 instead of 25. Just by delaying when she begins saving by five years, her savings at retirement would fall from $639,236 to $536,920—slightly more than 7X her ending salary. That would put her about $40,000 short of her retirement goal of $577,000, which in turn would reduce the income-generating capacity of her portfolio in retirement.

Of course, the longer you delay saving, the worse the shortfall is likely to get. “If you were to start saving at age 30, the goal of reaching 8 times your salary would still be achievable,” says Steve Feinschreiber, senior vice president of Strategic Advisers, Inc. (a Fidelity Investments company that is also a registered investment adviser). “But if you wait until you’re in your 50s, reaching 8 times your ending salary is going to be extremely difficult. That’s why it’s important to start saving early.”

Two: Retirement age

How ready is America to retire?

• Rev up your readiness to retire
• What will you spend in retirement?

Your retirement age can have an even bigger impact on your retirement savings. The longer you can postpone retirement, the lower your projected savings factor needs to be. For example, retiring at age 67 instead of age 63 would have given Lily four more years of income and savings, and four fewer years of retirement spending to worry about. Plus, she would be eligible to receive higher monthly Social Security. In our example, delaying retirement from age 63 to age 67 increased Social Security benefits to $1,918 a month throughout retirement, from $1,362 a month.

Bottom line: If Lily retires at 67, she would need to save $577,000, or about 8X her ending salary, versus $745,500, or more than 10X, if she retired at 63 and had the same spending goal. Wait to retire until age 70, and, in this example, she would need only $442,500, or slightly more than 6X her ending salary.

Of course, you can’t always control when you retire; health and job availability may alter your plans. But one thing is clear: Working longer will make it easier to reach your savings goals.

Three: Deferral rate

Even though Americans are saving more, most are still not taking full advantage of their workplace savings plans, and Health Savings Accounts (HSAs), if available to them. This problem is magnified by the fact that the vast majority of workplace savings plans set their deferral rates for auto-enrollment at 3%, well below Fidelity’s suggested savings goal of 10%–15%.3 That can be a lost opportunity, given the potential power of tax-advantaged compounding offered by a 401(k) and other workplace savings plans, HSAs, and the additional boost offered by employers who match employee contributions.

Consider the powerful impact of simply increasing the amount of your salary that you defer into a 401(k) or other workplace savings plan. Let’s say Lily started saving 8% of her salary at age 25 (instead of 6%), increasing her deferral rate to 15% at age 32. By 67, based on the assumptions above, she would have saved $763,332, or more than 10X her ending salary for retirement, an increase in retirement assets of $187,132.

Another consideration to help you improve the amount of your “paycheck” in retirement is to save additional money in an IRA. If you have maxed out your workplace savings plan, or do not have access to or choose not to invest in a workplace savings plan, IRAs can also be attractive savings vehicles. (Please note: IRAs have different yearly limits than workplace savings plans. Plus, there are catch-up provisions that let people age 50 and older save more in IRAs and workplace savings plans.)

Four: Replacement goal

It’s hard to decide how much you will need in retirement. We believe a good rule of thumb, based on investor surveys and research, is 85%4 of your ending salary, though individual needs vary greatly. Do you plan to travel extensively? Personal choices loom large here. And health care costs in retirement are an important consideration. So, you will want to make your replacement rate reflect your individual expectations and circumstances.

For example, if Lily wants to replace 80% of her salary in retirement5 instead of 85%, we estimate she would need to save about 7X her ending salary, or $504,000. However, if she aims to replace 90% of her income, she’ll need to save $671,250, or about 9X her ending salary.

Clearly, this kind of decision is tough to make decades before retirement. So, unless you have strong convictions about your specific spending needs in retirement, it may be prudent to use a replacement goal of 85% to calculate your savings factor.

Five: Rate of return

It’s impossible to predict the markets, but the performance of your portfolio will affect your retirement savings needs. Assume a modest 4.3% hypothetical long-term rate of return instead of Lily’s 5.5%, and your savings factor rises to about 9X your ending salary, based on the assumptions above. But if your portfolio returns 8.6% a year, you will only need slightly less than 6X your ending salary.

Of course, you cannot pick your return. In practice, rate of return is driven largely by asset allocation and market performance. It’s smart to make modest long-term return assumptions. If the markets perform well, you may have some extra money and could have more to spend, which is a lot better than relying on good returns and running out of money if they don’t materialize.

Six: Salary growth

Perhaps ironically, the faster your salary grows and the more you earn, the more you need to have saved in order to replace a given proportion of your final salary in retirement. Conversely, the slower your salary grows, the less you may need to have saved at retirement to maintain your lifestyle.

For example, if Lily were to get no real salary growth (keeping up with inflation only), she would need only $279,000 (in today’s dollars), or 7X her ending salary of $40,000. If that salary grows at a modest 1.5% annual rate after inflation, she will need $577,000, or 8X her higher ending salary.

Seven: Longevity

How long will you live? This is an impossible question to answer. Nevertheless, the number of years you assume you need to fund in retirement has a big impact on how much you may need to have saved. For example, if Lily assumes she will live to 96, instead of 92, her savings factor jumps from about 8X her ending salary to 8.6X.

In general, we recommend assuming a lifetime of 92 years for men and 94 for women.6 However, healthy men and women at age 65 have a 25% chance of living beyond these ages. If you’re a man and live to 85 (88 for women), you have a 50% chance of living beyond 85 (88 for women), and a higher chance of outliving your assets.

As you age, your health becomes more of a factor for your life expectancy. So, you may want to look at this assumption again, or at least understand the sensitivity of savings targets to longevity assumptions.

So what else should investors consider?

Many Americans are not adequately prepared financially for retirement, but they can change their savings behaviors. The steps are straightforward:

• Enroll in your workplace plan—the earlier, the better
• Save at the highest levels possible
• Increase your deferral rate periodically as your salary grows
• Invest in a diversified asset mix
• Do not overestimate your salary growth or your portfolio returns
• As you approach retirement, envision the lifestyle you want, and estimate what it will cost
• Own your plan—stick with it, stay engaged, and avoid taking out loans or cashing out when you change jobs.

There is no magic number for the amount you should have in retirement savings. Every individual’s priorities and needs are unique. But determining how much income you’ll need in retirement is a critical step in meeting your goals.