Executive Summary
The Fidelity Retirement Score is not bad, and it may do a reasonably good job of telling you where you stand in your planning for retirement, particularly if you are not highly paid and you don’t have sources of retirement income other than your savings and Social Security. We think the Fidelity calculator probably under-estimates required savings rates for more highly compensated individuals. The analysis that we performed and discuss below, may not be all that interesting to you unless you are a real numbers geek like we are. If you aren’t, feel free to skip the discussion below of how we kicked the tires on Fidelity’s calculator and our analysis of it.
The Fidelity Retirement Score—What we Like About It
- Fidelity’s calculator is sexy, quick, easy and, for many people, probably does a reasonably good job of measuring their retirement savings progress.
- Once you have entered your data, you can see how changes in the data you entered affect your score on the scoreboard screen without having to go back through the original data entering screens. You can also change your lifetime planning period from the default option of to age 93 on the scoreboard screen, which is helpful.
- The calculator estimates your Social Security benefit based on the pay you enter and does not require you to calculate your own estimated benefit. Nor does it require you to estimate your lifetime planning period (but you can change the default option if you want).
- The calculator projects what you could spend at retirement (including Fidelity’s estimate of your Social Security) and compares that with what Fidelity thinks you’ll need based on what you input for your desired standard of living in retirement. These amounts are shown in today’s dollars.
- The calculator uses a fairly conservative estimate of future investment earnings (at least compared with many other calculators) and doesn’t increase your projected income at retirement if you increase your investment risk (from the balanced option) by choosing investment portfolios with higher proportions of stock. See our last post, “Should Increasing Your Investment Risk Increase Your Current Spending Budget” for discussion of why we believe this is a good attribute.
- The Fidelity calculator is reasonably consistent with their advice to accumulate ten times your annual pay if you want to retire at age 67. We have found that this is not a bad rule of thumb, particularly for individuals with no sources of retirement income other than Social Security and savings.
As retired actuaries, we still like to crunch numbers. So, we crunched some numbers for individuals earning $50,000 per year and $200,000 per year using both Fidelity’s calculator and our Actuarial Budget Calculator (ABC) for Single Pre-Retirees. For the Fidelity calculations, we entered
- retirement at age 67,
- “Spend the Same” standard of living and
- “Balanced” investment style,
- Lifetime planning period ending at age 94 (vs. their default option of 93)
For the ABC calculations, we entered our recommended assumptions (4% annual investment return, 2% annual inflation and 2% desired increases in spending after assumed retirement). Consistent with these assumptions, we also assumed 3% annual increases in compensation. In order to make the ABC calculations somewhat comparable to the Fidelity calculations we also assumed:
- A lifetime planning period ending at age 94 (our recommended assumption for a 65-year old male),
- Social Security commencement at age 67
- No unexpected expenses, no desired estate remaining at death, no long-term care costs, no other non-recurring pre-retirement or post-retirement expenses, no other pre-retirement or post-retirement sources of income (such as annuities, matching employer contributions, income from part-time employment, proceeds from asset sales, pensions, rental income, etc.)
- No income from spouses and no decrease in desired spending in the event of the first spouse death
For both sets of calculations, we assumed the individuals had accumulated Fidelity’s age-related recommended benchmark amounts of savings for successful retirement at age 67:
- Age Target Accumulated Savings as a multiple of pay
- 35 2X
- 40 3X
- 45 4X
- 50 6X
- 55 7X
- 60 8X
- 66 10X
We also entered 12% of pay annual savings rates for both sets of calculations. For the Actuarial Approach Social Security benefit amounts, we went to the Social Security Online Quick Calculator and calculated projected benefits commencing at age 67 in future (inflated) dollars using a relative growth factor in future projected earnings of -1% to be consistent with our 3% annual pay increase assumption. We then calculated real dollar (today’s dollar) equivalent of this benefit using our 2% discount rate assumption.
We assumed the amount that Fidelity indicates as the amount you’ll need monthly in retirement will remain constant in real dollars throughout your period of retirement. It is not clear to us, however, how Fidelity incorporates their famous cost of healthcare in retirement estimate ($275,000 for a couple both age 65 retiring in 2017) into this amount you’ll need.
The table below shows the results of the calculations. Amounts are shown in today’s dollars.
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Our Analysis and Some of the Things We Don’t Like About the Fidelity Calculator
The first thing we noticed was even though the Fidelity calculator indicates that the spending target option they determine is “spend the same,” their idea of what this means is if your pay is relatively low, Fidelity believes your “spend the same” amount will be about 80% of your pay and if your pay is relatively high, your “spend the same amount” will be about 60% of your pay. By comparison, our ABC estimates your spending before retirement by subtracting what you are saving from your estimated pay. Thus, under our calculator, the more of your pay you save, the less of it you spend, all things being equal. However, since your work-related expenses and your taxes will probably less in retirement, our recommended income replacement target is about 85% of your “spend the same” amount.
The significant difference in how “spend the same” is defined in the two calculators results in significantly different spending targets and savings rates necessary to achieve retirement spending goals. While the Fidelity calculator appears to imply that an individual earning $50,000 should be saving more than 12%, the individual earning $200,000 appears to be in good shape. By comparison, our calculator implies that the $50,000 worker is probably ok saving 12% of pay (after adding in recommended levels of expected non-recurring expenses like long-term care costs), but the higher paid worker probably needs to save closer to 20% of pay to “spend the same” in retirement. Highly compensated individuals using Fidelity’s calculator might find that their “on target” score over 100 may not be as “on target” as they thought.
While Fidelity assumes that real wages will increase in the future for individuals, their calculator does not assume real Social Security benefits will increase for these individuals. Ours does. And while Fidelity’s calculator indicates, “your score is calculated assuming an underperforming market, so it represents a conservative estimate of how much income you could have during your retirement,” the balanced investment style appears to be expected to earn about 5% per annum and therefore would be expected to have more investment risk than the annuity-based pricing investment return assumption of 4% that we recommend. This extra investment risk is downplayed in the Fidelity calculator. The difference in expected returns (extra risk) is quantified by comparing the columns labeled “Projected Retirement Income @67 from Accumulated Savings.”
As discussed above, to facilitate comparison of the calculators we had to assume that the hypothetical individuals we looked at only had savings and Social Security benefits and further, they would commence Social Security at the assumed retirement age. In this respect, the Fidelity calculator has very limited flexibility to consider other sources of retirement income or other commencement dates and does not even attempt to consider couples planning.
Conclusion
We encourage you to use a calculator to plan for your retirement and to develop a spending/savings budget to help you achieve your retirement goals. And, when you are planning, it is also very important to remember that whatever calculator you use is only going to provide you with a planning “data point” for you to consider along with many other factors. For many single individuals, Fidelity’s calculator may provide a reasonably good starting data point. By comparison, our ABC’s for pre-retired single and couples may not be as sexy as Fidelity’s Retirement Score calculator (or others available on the Internet), and you may not be able to “know where you stand for retirement in 60 seconds.” However, we believe our calculators are more accurate and flexible in terms of considering all your potential assets and spending liabilities. We also give you the capability of reflecting the commencement of benefits (such as Social Security) at ages other than your desired retirement age, having increasing or decreasing patterns of real-dollar spending, and our spreadsheets can be used by individuals and couples outside the U.S. This is why we advertise our website as “The spending budget website for intelligent retirees and pre-retirees (and their financial advisors) who aren't afraid to do a little number crunching to get the right answer.”
As we have discussed in prior posts, it is also important for you to consider the potential for deviations from expected experience as part of your planning. For example, your employment may not continue until your desired retirement age, so you will probably want to be even more conservative in your retirement planning than indicated by any retirement calculator, at least until more-favorable-than-assumed experience emerges.
