Friday, October 5, 2012

Fideltiy Reitrement Rule of Thumb

How Much money do you need to retire?  Fidelity provides one answer.

A recent article on NBC discusses some "rules of thumb" established by Fidelity Investments, illustrating how much you need to retire on.

I discussed this in an earlier posting, and from my calculations, you'd need about $500,000 to $1,000,000 to retire in a comfortable middle-class lifestyle, provided Mitt Romney doesn't take away your Social Security.

We've all heard about the 4% rule, and the "one years' salary saved by age 30" rule.  But how much money do you need to really retire?  Fidelity uses the "8x" Rule:

For the savings-challenged, Fidelity’s Number is still daunting: You will need to have saved eight times your final salary by age 67 if you want to maintain a lifestyle similar to the one you have had while working, the company's planners figure. But Fidelity says it’s easier to get to the peak if you think of it as a series of manageable milestones through life.
To reach the 8x altitude, Fidelity says, here are check-down markers for getting to the golden peak at the right time:
  • 1x — Reach age 35 with one times your annual salary saved.
  • 3x — By 45, accumulate three times your salary.
  • 5x — When you are 55, your savings should have risen to five times your salary.
  • 8x — You are there. It is age 67.
This Rule isn't bad, but it has some caveats.   First, the idea that poor people can survive on less money is sort of flawed.  Similarly, the idea that rich people cannot live on less is also flawed.  There is no rule saying that since you make $100,000 a year while working, you need that much money to retire.

In fact, you may need a lot less.   For example, when you retire, you might sell your home and downsize to a smaller one, a condo, or a townhome.  You might be able to reap enough from your house to pay for the new one in cash.   No mortgage means a lot less income required, just to live.

Your car may last for a lot longer as well, as you drive a lot less than you used to, commuting.   And there is no need to buy suits, have shirts dry-cleaned, or eat lunch out with the gang at work, anymore.

So one way to make this "8X" number is to simply lower the "X" part.

But a better plan is to save up over the years.  Just a little bit at a time, adds up.

Will I make it to the 8X level?  Well, I'm afraid to say it, but I'm already there, at age 52.   If I base this on the income I used to make as a big-shot attorney (as opposed to the washed-up has-been of today), I easily have eight times that in the bank.  Or if I include all my assets, at least 15X.

But if I base it on the paltry amount I make these days, I have at least 16X in savings and investments, and 30X overall.

Sounds pretty sweet, right?   Problem is, I can't spend any of it.  I am seven long years away from that beautiful age of 59-1/2, when I can tap into this hoard.   And the rest is tied up in investment Real Estate that I cannot liquidate just yet.

And the other problem with having money is, well, once you spend it, you no longer have it.   So it is great to have all this dough, but you aren't rich if you just go out and blow it all.

So, for the time being, at least, I will try to live on my paltry income.   It is weird, but I am wealthy and poor at the same time.  Wealthy in terms of Net Worth, poor in terms of income.  All things considered, I think this is preferable to being wealthy in terms of income and poor in terms of net worth.   I pay less taxes this way, and being income-rich and asset-poor is really just, well, plain poor.