March 13, 2019
One of the questions we are frequently asked from our divorcing clients is, “Will I be able to retire?” Looking at half of the pot of money the couple had amassed during the marriage can be a shock as our client realizes that divorce may have taken them a few steps backward on the path to retirement.
Answering this question depends on many factors, among them: What will you spend in retirement? How much longer will you work? What can you save each year towards your retirement? It is not as easy as simply looking at the value of the IRA or 401(k) account.
Investment News magazine recently published a rule of thumb from Fidelity of how much to have saved at each age, that they suggest will serve as a handy guide to know whether your client is on track to retire. According to their data here’s what an individual should have in retirement savings:
If you are age 20-29: one times annual salary
If you are age 30-39: three times annual salary
If you are age 40-49: six times annual salary
If you are age 50-59: eight times annual salary
If you are age 60-69: ten times annual salary
We have no knowledge of the assumptions Fidelity made, such as retirement age or investment returns. So, we tested the recommendations above with our own retirement projection. We assumed our client Jane Doe age 59, who spends $85,000 per year, had indeed saved eight times that amount ($680,000) by the end of the 50-59 decade. We also assumed she earns a relatively modest 6% investment return, is entitled to Social Security, retires at age 67 and lives to age 95. Our projection showed that Jane has not saved nearly enough; she still needs to save $46,000 per year, which is over half her salary, if she wants to continue to spend $85,000 per year in retirement. If we back down her age to 50, the beginning of the decade, then she was in great shape and needed to add only $10,000 per year.
Therefore, because the outcome varies so much between a client who is at the start of the rule-of-thumb decade and one who is at the end of it, in our opinion this rule of thumb is probably not very accurate. (Maybe it is accurate under certain circumstances but those are not divulged in the article.) If your client wants to know for sure whether he or she can retire at a desired age, a Certified Divorce Financial Advisor should be consulted. Our more detailed projections can relay a realistic projection of the future.
Many times, a divorce results in a standard of living for one or both parties that is lower than the standard they had been accustomed to during the marriage. We are experienced with having this type of conversation with clients and helping them adjust their expectations. That is a far better service to offer your client than a general rule of thumb.