Among the wide-ranging findings in Fidelity Investments’ 2021 State of Retirement Planning Study, released March 24 (see related article here), are six basic retirement “rules of thumb” that most Americans are getting wrong.
Fidelity’s national online survey consisted of 1,204 adult financial decision-makers who were not retired. Respondents had at least one investment account and those over age 34 had at least $100,000 investable assets.
The study uncovered several areas of opportunity when it comes to helping 401k savers gain a better understanding of common retirement rules of thumb. Among them:
How much to save for retirement
Only 25% of respondents accurately indicated that financial professionals recommend having 10-12 times your last full year of working income by the time you reach retirement. Half of all respondents thought the figure would be only 5 times or less. Fidelity’s rule of thumb? Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by age 67.
How much to withdraw in retirement
28% said that financial professionals would recommend a withdrawal rate of 10 to 15% of retirement savings every year, a withdrawal rate that would use up one’s retirement savings quickly. Withdrawing that amount would be far above Fidelity’s suggested rate of 4% to 6% annually.
- Extra Insight: Retirees Reduce Spending As They Age, New Research Finds
Market returns
Almost three-quarters (72%) of respondents believe the stock market has seen negative returns more frequently than positive ones over the past 35 years. It may come as a pleasant surprise for people to learn that the stock market has had a positive annual return for 26 out of the past 35 years.
- Extra Insight: Trump or Biden: What History Predicts for Stock Market
The cost of out-of-pocket health care expenses
Most respondents vastly underestimate the cost of out-of-pocket health care for a couple in retirement, with 37% guessing between $50,000-$100,000. In fact, for a couple retiring at 65, the actual average cost throughout their retirement is three times higher, at $295,000.
- Extra Insight: This is How Much Retiring Couples Will Spend on Healthcare
Full retirement age for Social Security
Only 17% of those surveyed correctly identified their Full Retirement Age (FRA) for Social Security, including 44% of Gen Xers, who underestimated their FRA of 67. Although Americans can start receiving Social Security retirement benefits as early as age 62, claiming Social Security benefits any time before reaching FRA can lock in a permanent reduction in monthly income. For people born between 1943 and 1954, the FRA is 66. People born later have an FRA of 66 (plus some months) or an FRA of age 67. Waiting to claim Social Security after age 62 comes with a bonus: roughly 8% additional monthly income per year for each year you delay claiming (up to age 70).
- Extra Insight: What Raising Retirement Age Does to Retirement Rates
The impact of divorce on Social Security
There’s good news on this front. While 63% of respondents think a former spouse has the ability to reduce their monthly benefits, the truth is, one’s Social Security benefit is not reduced if an ex-spouse claims some of their Social Security benefits. If you’re divorced and meet certain conditions, you’re entitled either to your own Social Security benefit or to 50% of your ex’s Social Security benefit, whichever is higher.
- Extra Insight: Divorce, Job Loss Drive Early Withdrawal from 401ks
- SEE RELATED ARTICLE: 82% Say Pandemic has Negatively Impacted Retirement Plans
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
