Please ensure Javascript is enabled for purposes of website accessibility

How to Retire on Your Terms

By Dan Caplinger – Updated Apr 7, 2017 at 12:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Saving for retirement is a struggle, but it can be done.

Throughout September, the Motley Fool has followed its mission to help you invest better by reaching out to millions of readers to help them gain more investing knowledge and achieve financial freedom. Assuring yourself a comfortable retirement is one of the most important ways you can get your finances in order.

One of the keys to applying your investing knowledge toward solving the problem of how to save for retirement is matching up your expectations of your retirement lifestyle with the money resources you're likely to have when you retire. A recent report from Fidelity Investments sheds some light on that all-important question, but it also raises some questions about whether you might be better off following your own investment plan under certain circumstances.

How to retire rich
It's pretty much impossible to come up with a surefire magic dollar figure that would guarantee a prosperous retirement under every circumstance. With so many variables to consider, including investment returns, costs of living, and the uncertainties of your health and other unpredictable expenses, most people would need to save up far more than they'd be able to in order to eliminate every speck of doubt about whether they'll have enough money to last the rest of their retired lives.

In an effort to make retirement saving easier, though, Fidelity came up with a list of guidelines for investors to follow. The advice takes a few different forms:

  • To replace 85% of your income from before retiring, you'll need to have about eight times your salary saved in your retirement nest egg.
  • If you expect to retire at age 67, then you should have savings equal to your salary by age 35, three times your salary at 45, and five times your salary at 55.
  • To get there, you need to save between 6% and 12% of your salary in a 401(k) plan that pays you a 3% match. In addition, you need to earn a 5.5% average annual return.

Simple ideas of how much to save and where you ought to be at various points in your life can be useful. But they can also mislead you if the assumptions they make don't apply to you.

Bringing theory to life
The problem with any hypothetical framework like Fidelity's is that you have to make assumptions in order to come up with fixed numbers. Yet if you change the assumptions, the impact on the general guidelines they produce can change dramatically.

For instance, you could easily make an argument that a 5.5% annual return expectation is far too low, especially for younger investors who can afford to invest more aggressively. Despite widespread discontent about lackluster stock-market returns through the decade of the 2000s, more than two-thirds of the stocks in the S&P 500 have beaten that 5.5% figure over the past 10 years. Almost half have managed to post double-digit average annual percentage gains during that timeframe.

Admittedly, to get truly strong gains, you need to have had both foresight and perhaps a bit of luck. Buying (Nasdaq: PCLN) and Akamai (Nasdaq: AKAM) at their 2002 lows sounds like a no-brainer now, but in the depths of the Internet bust, it seemed quite reasonable to count them out as future contenders. Predicting that they would enjoy such huge recoveries from the downturn would have looked ridiculous.

But you don't have to have taken on huge risks in order to earn solid returns. Even relatively stable companies have stayed the course. McDonald's (NYSE: MCD), for instance, has been less than half as volatile as the S&P over the past five years while still returning 19% per year since 2002. Altria (NYSE: MO) and AutoZone (NYSE: AZO) have similar risk-reward patterns thanks to solid demand and favorable economic conditions for both companies.

If you can boost your average return, then meeting Fidelity's guidelines will make you even more prepared for retirement and give you room to miss some of its benchmarks along the way. When it comes to saving for retirement, you can use all the breathing room you can get.

Keep on learning
Retirement is an important goal to strive for, but it's not the only one. Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

Fool contributor Dan Caplinger always tries to live on his terms. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of and McDonald's. Motley Fool newsletter services have recommended buying shares of McDonald's and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy meets you on your own terms.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Booking Holdings Stock Quote
Booking Holdings
$1,709.73 (-0.98%) $-16.98
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$42.99 (0.21%) $0.09
McDonald's Corporation Stock Quote
McDonald's Corporation
$234.75 (-1.81%) $-4.34
AutoZone Stock Quote
$2,215.88 (-1.32%) $-29.57
Akamai Technologies Stock Quote
Akamai Technologies
$84.44 (-1.10%) $0.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.