Global Retirement Rules of Thumb for International Employers

Just like in the United States, workers around the globe are being asked to assume greater responsibility for their retirement savings.

To recognize this trend, Fidelity has introduced a set of international retirement savings guidelines to help multinational companies and their employees. The first set of guidelines is tailored to help international employers identify the unique financial hurdles faced by workers in the U.K., Germany, Japan, Hong Kong and Canada.

Jeanne Thompson, senior vice president and head of workplace solutions thought leadership for Fidelity, tells PLANADVISER the new guidelines should offer a practical framework to help global employers begin to understand how much money different workers need to save for a stable retirement. And even for U.S.-only employers, the guidelines will help demonstrate how assumed difference in longevity, access to private/public pension funds and various other factors impact a given working population’s retirement prospects.

“These guidelines can be part of an innovative international benefits program and can help employers monitor and encourage good retirement savings habits in a consistent manner across their regional workforces,” Thompson says. “The global retirement savings guidelines, which leverage a U.S. framework also known as ‘10X’ or age-based savings guidelines, are based on two metrics every worker knows—their age and salary.”

This provides workers and employers with a straightforward approach to understanding how much they should have in savings, as a multiple of their salary at specific age milestones. The projections become even more helpful when combined with locally relevant financial and demographic assumptions.

How much to save across geographies

As Thompson explains, Fidelity’s global retirement savings guidelines are based on several key assumptions and calculate a suggested annual savings rate and age-based savings milestones for each country. The guidelines also include a target income replacement rate and a “probable sustainable withdrawal rate,” which helps workers understand how much they will be able to withdraw from their savings each year without running out of money in retirement. 

In the United Kingdom, the guidelines for workers are to save a total 13% of their annual salary each year and aim to have saved seven-times their salary by retirement.

“This will put them on track to replace 35% of their pre-retirement income, which we estimate, when combined with their government pension, may enable them to maintain a pre-retirement lifestyle throughout retirement,” Thompson says, noting that Fidelity’s guidelines for U.K. workers are based on a 5% sustainable withdrawal rate in retirement.

Fidelity finds certain savings guidelines for workers in Germany are similar to those for U.S. workers. Notably, workers in Germany are encouraged to aim to have saved 10-times their final salary upon retirement, which will replace 45% of their pre-retirement income.

“The 4.6% withdrawal rate is consistent with the 4.5% withdrawal rate for U.S. workers,” Thompson says. “However, German workers are encouraged to save 21% of their salary each year.”

Facing an even more challenging savings picture, workers in Hong Kong are encouraged to save 12-times their final salary and have a suggested savings rate of 20%, which will put them on track to replace nearly half (48%) of their pre-retirement income. According to Fidelity, Hong Kong workers’ 4.1% sustainable withdrawal rate is the second lowest, only higher than Japan’s.

“The savings milestones are higher than the U.S. guidelines for several reasons, including the assumed retirement age in Hong Kong is earlier, the expected lifespan is longer and the assumed investment returns are on the lower end of the spectrum,” Thompson says.

Workers in Japan have a suggested savings rate of 16% of their annual salary, which is similar to the savings rate for U.S. workers, but Japanese workers are estimated to only need to aim to save seven-times their ending salary and replace 36% of their pre-retirement income. Workers in Japan have the lowest probable sustainable withdrawal rate (3.9%) due to the lowest expected long-term investment returns among the regions.

In Canada, the retirement savings rate for workers is only slightly higher than the rate for their counterparts in the U.S. The suggested savings rate for Canadian workers is 16% and with a target of saving 10-times their final salary, which will replace nearly half (45%) of their pre-retirement income. The suggested withdrawal rate of 4.5% is in line with the U.S.

Interpreting the findings for U.S. employers

The guidelines show broadly how having an employer based pension plan reduces the amount a person has to save, as well as the “X factor” at retirement, as they would be receiving income from their pension, so would therefore have to save less.

According to Fidelity, for every 1% of projected retirement income replacement from a pension, the required personal income replacement rate naturally declines by 1%, which has the effect of lowering savings rates and savings milestones. For example, in Germany where the state/government pension is estimated to replace approximately 41% of pre-retirement income and the suggested personal income replacement rate is 45%, Fidelity suggests a 21% savings rate and a savings milestone of 10-times.

However if the person had 10% of their retirement income coming from a pension plan, they could reduce the savings rate from 21% to 16% and X factor would drop from 10-times to seven-times. By the same token, if a person expects 20% of their retirement income to come from a pension plan, they could reduce the savings rate from 21% to 12% and X factor would drop from 10-times to 5-times.