Many articles have been written about the savings you need to have at different ages. In 2009, I wrote my own article Retirement Savings Ratio, which included a spreadsheet to track your own situation. Fidelity recently offered a chart which the New York Times picked up and ran as a story. What’s amazing to me is the numbers are not correct. To be clear, I’m accepting the assumptions Fidelity offers. 5.5% is a pretty conservative growth number, as is a 1.5% annual raise.

Now, when you take the spreadsheet and do a bit of editing, the numbers speak for themselves.

- Zero out savings from 20 through 24.
- Change Annual Raise to 1.015 (this is 1.5%)
- Change percent saved to .15, then manually change the percent to 9 for age 25 and increase 1% each year till age 30
- The above builds in the 3% employer deposit, so all set there.
- Annual return is 1.055 (this is 5.5%)

Sorry if this is a bit tedious, but it’s how you can see the numbers for yourself. The result is that the chart underestimates savings by nearly 50% by retirement at 67. From the spreadsheet I wrote:

Age | X Salary |

25 | 0x |

30 | .09x |

35 | .75x |

40 | 2.91x |

45 | 4.34x |

50 | 6.07x |

55 | 8.18x |

60 | 10.73x |

67 | 15.25x |

I was tipped off that something was wrong when I saw linear growth, 1x through 6x every five years. That alone told me these numbers weren’t calculated correctly. Growth over time is exponential, not linear. Don’t believe me, pull a copy of the spreadsheet and run the numbers yourself. Most important, don’t believe everything you read. Unfortunately, I can’t get a copy of the underlying spreadsheet Fidelity used to produce their chart, but you can grab a copy of mine.

Keep in mind, rules of thumb are just that, guidelines that apply to people in the center of a range. Some people retire and find that with 40-50 hours more time each week, are spending far more than they did prior to retiring. Others were saving 20% for retirement, 20% went to the mortgage, and 20% or more to college tuition payments. These folk were living on less than half their income. This article was not about calculating your number but about my observation how one pro got it wrong. A future article will discuss your number in greater depth.

Joe, my impression from the Times article is that Fidelity started by calculating the final multiple you would need (8X final salary) to replace final income at 85%. I think they factored in social security and possibly subtracted out the yearly savings from the final income. 8X final income at 4% withdrawal rate gives you 32% of final income from investments. So for instance, a person saving 15% prior to retirement would actually already be living on 85% of income. If spending needs dropped an additional 15% at retirement, they would only need 72% of final income. If social security amounts to 35-40% of final income, plus the 32% from investments gets you to 72%. I think once Fidelity settled on the 8X final income number, they worked backward to age 25 to figure out the track which got you to 8X by age 67.