If you're saving for retirement in Japan or the United Kingdom, we have good news for you. You need only accumulate seven times your final salary to fund your desired standard of living in retirement, according to Fidelity Investments, which this week released rules of thumb or retirement savings guidelines for workers in six major countries and regions.
By contrast, if you're saving for your golden years in the U.S. Germany or Canada, you'd need 10 times your final salary in your nest egg and if you work in Hong Kong, you'd need 12 times your final salary set aside, according to Meghan Murphy, vice president, thought leadership at Fidelity Investments.
According to Murphy, the global guidelines are designed to engage workers with clear, simple "rules of thumb" to help keep their retirement savings on track. She also said guidelines serve as a starting point for a broader retirement planning discussion and are intended to address two of the most common retirement-related questions from workers: "How much do I need to save for retirement?" and "Am I on track to save enough?"
"People always ask: 'How much should I be saving?' and Am I on track?' And typically, the answer several years ago to that was, well, try to save enough to replace 45%of your income in retirement, and to the average person, that's not really an answer because how do you calculate that and where do you even begin?"
So, she said, "Fidelity wanted to go beyond that to be able to answer those simple questions and we developed a set of guidelines to help people not only understand what they should be saving today, but what they should be aiming to save come retirement as well."
Fidelity noted in its release that the global retirement savings guidelines are based on two metrics every worker knows -- their age and salary. Murphy noted that Fidelity previously published a U.S. framework also known as "10X" or age-based savings guidelines. Those guidelines established how much U.S. workers should have in savings, as a multiple of their salary at specific age milestones. For instance, those in age 30 should aim to have saved one times their salary for retirement whole those age 50 should aim to have six times their salary set aside.
"We've had great success here in the United States," said Murphy. "These milestones are well-known by employers and many of their employees and now this is a step we have taken to share those types of guidelines or rules of road for retirement throughout the world."
As part of its effort to provide workers in the U.K., Germany, Japan, Hong Kong and Canada with age-based savings milestones, Fidelity factored in average capital market returns, expected retirement age, government or state support, spending habits, and housing costs specific to each country. Read more here.
For instance, Fidelity noted that workers in the U.S would need to save 15% per year, including employer contributions to a worker's retirement plan, over the course of their working years to accumulate 10 times their final salary. By contrast, they would need to save 13% per year in the U.K., 16% per year in Japan and Canada, 20% per year in Hong Kong, and 21% per year in Germany.
Fidelity also calculated what percent of pre-retirement income would be replaced if workers reached their respective saving milestones. In Hong Kong., the income replacement rate would be 48%; in the U.S., Germany and Canada it would be 45%; in Japan it would be 36%; and in the U.K. it would be 35%.
Historically, experts have suggested that workers aim to replace 75% to 85% of their pre-retirement income though a mix of personal assets, Social Security, pensions and the like. On average, Social Security replaces about 40% of pre-retirement income, though the percent varies greatly by income. Read more here.
An Investment Company Institute report published in 2006 showed that those in the lowest income quintile who saved the maximum possible in their employer-sponsored retirement plan over the course of their working years would replace 106%of their pre-retirement income though a combination of 401(k) savings and Social Security. Read more here.
Fidelity also noted different sustainable withdrawal rates for workers around the globe: workers in the U.K. could withdraw 5%, the highest percent, while those in Japan could withdraw 3.9%, the lowest percent. Workers in the U.S., meanwhile, could safely withdraw 4.5%, which is one-half of one percentage point higher that what financial planners have historically recommended as safe and sustainable withdrawal rate. Read more here and here.
According to Murphy, the savings guidelines are really meant to be a starting point, not hard and fast rules. "They are averages and they are based on average input," she said. "They certainly do not replace an in-depth personal guidance session when talking about planning for retirement, but they are meant to get people thinking."
She also noted that there's is a bit of flexibility if you plan to retire earlier than, say, what's the normal retirement age for your country, you may need to save a little bit more. "If you plan to retire later, you might need to save a little bit less," she said. "What they're really meant to do is engage people and get them thinking about that they should be saving and how they can work to meet these guidelines as they move forward."
Murphy said what surprised her most about the global savings milestones was learning the degree to which social programs rather than defined contribution plans play a role in a worker's savings goals in places such as Japan and Hong Kong. "In Hong Kong the government income replacement rate is only 4% annually, which means you would think they have to save so much more, but, in reality, there's other social programs that supplement some of their income in retirement," said Murphy, nothing that "spread of the (defined contribution) mindset is slowly going across the world."
She noted, for instance, the "United Kingdom is very much on board but there's still work to do in other countries to help workers understand that in the future they will be responsible for replacing their income in retirement."
By way of background, other organizations have identified how much workers should have saved as a multiple of final pay that the average employee needs to save for an adequate retirement at age 67. For instance, the Aon 2018 Real Deal report puts the multiple at 11.1 and the savings rate to reach that goal at 16%, starting at age 25. Of note, the Aon report suggests that Social Security will replace 5.3 times a worker's final pay over the course of retirement, and that the total need to fund an adequate retirement at 16.4 times final salary. That very same report suggests that the average full-career employee is projected to have saved just 7.9 times final pay at retirement, far below the 16.4 needed.
Another report published by the Center for Retirement Research suggest that about half of households - between 42 and 60% - may fall short of being able to replace 75% of their pre-retirement in retirement.
Criticism of savings targets
To be fair, not all experts think workers need to accumulate 10 times final pay to fund retirement. For instance, Andrew Biggs, a resident scholar with the American Enterprise Institute, says a medium wage earner need only accumulate five times their final salary.
"It seems Fidelity assumes a target replacement rate of 92%, which is too high for almost anyone," he said. "A medium wage worker would receive a Social Security benefit equal to about 50% of his late-career earnings. If he wants to have a total retirement income replacement rate of 75%, he'd have to come up with another 25% through personal savings. Assuming a return on post-retirement savings of 3%, he could get there with savings of about 5x his final salary."
And for a low-wage worker, where Social Security replacement rates are higher, required savings are lower, he said. "So, the real question is: 'Why anyone needs a 92% replacement rate, when most financial advisers recommend 70%?'" Biggs asked. Read more here.
Typical Replacement Rates Far Exceed 70% Target Level
Others also criticized Fidelity's rules-of-thumb savings guidelines.
"The advice to save 15% over your whole career works best for people with stable lives and stable jobs, which is a lucky few," said Teresa Ghilarducci, a professor at the New School for Social Research and co-author of Rescuing Retirement. "The report continues the policy fantasy that individuals can save their way out of the retirement crisis on a voluntary basis."
The report, she said, "also ignores the real and practical problems of decumulating millions of dollars at retirement."
Workers, Ghilarducci said, have gotten the same advice for years but the median retirement savings for workers approaching retirement is inadequate; it is less than an average year's salary, $15,000. What's more, she said, "the highest paid older workers in the top 10% of the earnings distribution have only a median value of $200,000."
And, more than 63 million Americans have no access to retirement plans at work, Ghilarducci said.
Most recently, President Trump signed an executive order to expand access to workplace retirement savings plans for American workers. According to the executive order, 89% of workers at establishments with 500 or more employees are offered a workplace retirement plan. In contrast, only 53% at establishments with fewer than 100 workers are offered a workplace retirement plan.
In addition, several states, including Illinois, are putting in place state-sponsored retirement plans to address what is often referred to as the retirement coverage issue. Read more here.
It's never too late -- or too early -- to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.