Retirement Rule of Thumb #537: Age-Based Targets at 35, 45, and 55

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Here’s yet another retirement rule-of-thumb, this time by Fidelity Investments.

[…] the average worker may replace 85 percent of his pre-retirement income by saving at least 8 times his ending salary. In order to reach the 8X level by age 67, Fidelity suggests workers have saved about 1 times their salary at age 35, 3 times at age 45, and 5 times at age 55.

As usual, these number are based on a long list of assumptions. Start saving at age 25, retire at 67, nice gradual income growth, nice gradual portfolio growth, and so on:

The company’s 8X savings guideline is based on a hypothetical worker saving in a workplace retirement plan, such as a 401(k), beginning at age 25, working and saving continuously until 67, and living until 92.

• The employee will make continuous annual salary contributions to a workplace plan beginning at 6 percent and escalating 1 percent per year until 12 percent, plus receive an ongoing 3 percent annual employer contribution during their career.
• The calculation assumes a lifetime hypothetical average annual portfolio growth rate of 5.5 percent.
• Social Security payments are factored into the replacement income ratio of 85 percent.
• The employee’s income grows by 1.5 percent per year over general inflation with no breaks in employment or savings.

Focusing on the positive, these age-based targets are meant to be more helpful when setting goals than big, scary numbers. Also, these rules reinforce the idea that starting early is very important as it gives compounding time to work.

But again, we see the same-old assumption that you will constantly spend a certain % of your working income. Why? The implicit acceptance that spending should be linked to salary keeps you from ever getting ahead. Think about it; Your spending can be completely independent of salary. Instead, you earn more, you spend more, and the hamster wheel goes ’round and ’round:

Image credit to and FOEI.

The reason why I write is that working 40+ hours a week for 40+ years is unacceptable to me. Retirement rules should be based on your spending, not salary. Salary is important, but your spending determines how much money you need to save. Your spending is also much more under your control than most people admit. 25 times your annual spending; That’s my guidepost.

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  1. Great post. All of this obsession with multiples of current income is hilarious. The same could be said of life insurance advice as well.

  2. Don’t forget about people’s biggest expense….taxes. The tax code is filled with ways to radically and legally decrease your taxes. All you have to do is something the government wants you to do. Things like farming, gas and oil drilling, and my favorite, real estate……You can get your cash flow tax free thanks to depreciation. In fact, depreciation helps keep the new 3.8% medicare tax at bay too. While one puts actual money in his or her pocket from cash flow, depreciation creates a paper loss thanks to the government.

    With paper assets, if you want to liquidate, you have to pay capital gains tax. With real estate, a liquidity event can be a 1031 exchange which defers the tax, or one can do some equity harvesting via a refinance which is always tax free.

    You can’t do these things with REIT’s, but with physical real estate, you can grow your wealth tax free…….Most people avoid real estate because of the management headaches, but what they don’t realize is that unless they have the expertise, they shouldn’t be managing the property in the first place. Leave that headache to the experts.

  3. Assuming 10x salary while spenidng 85% of (preretirement salary) is a savings to spending ratio of 11.8. I think your ratio of 25x is much more realistic (maybe even 30x to 40x to be super safe). Am I missing something or does this 10x salary value seem awfully optimistic in terms of returns that will allow your capital to survive 20 to 30 years?

  4. Oops, it’s even worse, I misread and thought they said 10x, they are targeting only 8x salary at a spenidng of .85 salary at retirement which is savings to spending ratio of 9.1 … I must be missing something unless they are only assuming 12 year retirement for the worker bee.

  5. I agree. Current salary has almost nothing to do with what you might spend in retirement. Instead of 85% of your salary, it should be something like X% of your ending spending – or something along those lines. The only reason these financial websites use salary is because they know it will mean coming up with a much bigger number and more money put in their investments.

    I have multiple Quicken reports that show only those expenses that I assume will continue into retirement. I add in some money for insurance (retire early) and a couple other things and I still only come up with 65% of my current EXPENSES. It’s only 35% of current salary. I would never retire if I thought I’d need income equal to 85% of salary saved up (somewhere around $4.5 million!). I’m only a few years away from retirement, so my numbers are probably more “accurate” than if I was in my 30’s trying to make this calculation.

  6. CPA Exam Coach says

    well said Jonathan. it’s interesting to observe professionals in my line of work continue to emphasize savings needed as a percentage of ending salary, and understandably so from their perspective (they need to sell financial products). deep inside, the prudent know that it is all about the burn rate. I continue to feel the widely popular sentiment (numbers that are thrown out there) is way overstated, at least for my household. wished more folks thought this way but unfortunately many correlate spending to income. it almost feels that they have to.

  7. Strong post, and I agree with your take on this. As you point out, the income-based guidelines are probably an “okay” way to think about it, especially for young adults who are just beginning to realize the importance of getting started. And, when you’re in your 20s, for example, it’s pretty tough to know what your burn rate is going to be a decade or two down the line.

    Even so, the great point your post makes is the importance of “breaking the link” between spending and income. The link is reinforced 24/7 by everybody from advertisers to news media to politicians, and it’s a myth that needs busting! So I’m sharing this post far and wide, because you explain the myth-busting case really well.

  8. Jenna, Adaptu Community Manager says

    Oh man! That is a lot of expectations. No wonder so many people aren’t ready for retirement.

  9. So if you had to give age guide posts to your spending replacement theory, where would they lie (take for instance the one’s that Fidelity uses above @ 35, 45, and 55)? I know your plan is to retire in your 40’s so maybe a highlight of where you think you should be/should have been at 30, 35, 40 also? If someone did plan on working till 60 or 65, what kind of spending replacement multiplier do you think they would need compared to your 25X for retiring in your 40s?

  10. @tony – I think Social Security makes a big difference in their numbers as they assume you retire at full retirement age of 67 and go directly into receiving SS benefits.

    @Nic – Well, the bad news is that if you want to retire really early, then you won’t be able to depend on compounding returns to do some of the heavy lifting. It’s much easier to assume you save money at 25 and not touch it until 67, compounding the entire time. But if you do plan on working until 65 (which may happen to me, but more something like 10-20 hours a week, 9 months year), then it may look similar. I haven’t done the math, but…

    The key is that allowing your income to grow without increasing spending will make your progress much, much faster. AND at the same time your savings goal will stay small, unlike the assumption that your spending just keep growing which means your required savings goal just keeps growing.

  11. I would love to see what the social security number is they used in this estimate. Actual soc sec is bigger than most people think when sized into the furture and is probably quite large if they are looking 42 yrs out with the current payout structure. I would scale any soc sec estimate to 75% of what any pgm tells you.

    Then to only live 25 yrs (to 92) is the real kicker. I guess longevity rates will go to pot if everyone has to work 42 years! I would think 30 yrs would be a more standard minimum.

    Also, @Dbeth: taxes are not the biggest outlay, it is usually housing. I’m in the 25% marginal rate, but total taxes (even w/ oasdi and medicare) is about 16-17% of total pay. The burden of taxes is overblown in a lot of cases, especially when you factor in your entitlement to soc sec and medical care later (leaving out the arguments on what form that takes later on….)

  12. I guess you and I live in different size houses. I pay $2600 a month for my mortgage and over $50K a year in taxes……and that doesn’t take into consideration sales tax, property tax, gas tax, etc. That’s just state and federal.

  13. Just taking a crack at @Jonathan’s where abouts…I’m guessing no State Income tax?

  14. I take that back, it sounds like he does have state income tax….based on the statement in the 28 day treasury ladder in this article:

  15. There was a Reuters article on Monday about Fidelity’s guideline

    It mentions a financial planner at T Rowe Price citing 12x salary in savings at retirement, which is what I’ve read elsewhere as well.

    As far as Social Security, it’s best to go online and review your own information regularly to have some idea where it’ll be at retirement. Personally, I try to plan both with and without social security.

  16. This post reminds me of the extreme early retirement book. I constantly have issues keeping my level of spending to a level that would allow something even close to extreme early retirement. I need to find cheaper hobbies.

  17. @Dbeth: Recently realized about the depreciation and effectively taxfree income. Almost too good to be true and it is. Taxcode is written by folks who benefit from it.

  18. Nice post 🙂 I absolutely agree with you that spending should be the thing to determin your savings.

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