The Save 10% for Retirement Rule Is Stupid

Corey —  October 6, 2010

Cracked Nest Egg Because of Stupid Retirement Rules       The “save 10% for retirement” rule is absolutely stupid. And so is “save 15% for retirement” (sorry, Dave Ramsey) or “save 20% for retirement” and any other “save #% for retirement” rule you’ll come across. Now I don’t doubt that the people giving this advice meant no harm. They probably just want to get you to start saving for retirement, and offering a simple % of your income solution is a quick, easy answer for a difficult question.

       But they’re all absurd, useless rules for one simple reason: they completely ignore your situation. For most people, a simple rule like “save 10% of your income for retirement” is likely to be wrong (and blindly following dumb advice like that can have nasty results). The right answer depends on seven major factors that are specific to you and your situation. Specifically, they are:

  1. Your Current Age
  2. Your Retirement Age
  3. Your Life Expectancy
  4. Your Current Savings
  5. Your Investments
  6. How Much Income You Need for Retirement
  7. Your Current Income

       All of these factors work together to determine how much you should be saving for retirement each year. Let’s break them down.

Your Current Age & Retirement Age

       The difference between your retirement age and current age determines how long you have to save and invest. If you’re 25 now and don’t plan on retiring until you’re 70, then you’ve got 45 years until retirement. But if you’re 50 and want to retire at 65, well then you’ve only got 15 years. That’s a huge difference!

       The longer you have until retirement, the less you’re going to have to save. But these simplistic rules ignore this completely. If you’re young and just starting out, these rules might be OK for you. But if you’re older and haven’t done so well with saving for retirement, you’re not going to be happy when you realize you can’t retire because you didn’t save enough.

Your Life Expectancy

       Trying to guess your life expectancy can be a shot in the dark. You don’t really know when you’re going to die. But your health, your habits, and your family history do affect how long you can expect to live. Obviously, the longer you’re likely to live, the more you should save for retirement. But these dumbed-down % rules don’t account for this at all.

Your Current Savings

       If you’ve been wise and have already been saving a lot for retirement, you may not need to save 10% of your income. But if you’re 50 years old and haven’t saved a dime, then even 15% or 20% are unlikely to cut it unless you’re willing to make some major changes to your life and retirement plans. How much you already have saved can drastically affect how much you should save for retirement, but once again these % of your income rules won’t help.

Your Investments

       Are you so afraid of risk that you’ve vowed only to use CDs to save for retirement? Well, I can tell you that you’re going to need to save a whole lot more than 10% of your income even if you’re starting at 18 and don’t plan to retire until you’re 75. Your investment returns (which are connected to the risk you’re willing to take) will drastically affect how much you need to save. Based on what I can figure, the % rules assume you’re going to invest in a moderately aggressive mix of stocks and bonds that you tone down as you get closer to retirement. So if your risk tolerance is higher or lower, these rules won’t work for you.

How Much Income You Need for Retirement

       How much income you need for retirement is also a huge factor in figuring out how much you should be saving. Are you going to get a pension? Well, you’ll need less income from your own savings (lucky you). Do you plan to downsize and cut way back on some major expenses? Then you probably won’t need to save as much. Want to travel the world extensively? You might have to plan on saving more if your retirement expenses are going to drastically exceed your current income.

       You see, these % rules assume you’re going to need about 80% or so of your income in retirement. (That’s a stupid assumption for some other reasons, but I’m saving that for a different post.) So if you’re going to be different, these rules just won’t work for you.

Your Current Income

       Finally, and this should be obvious, your current income will affect the % you should be saving. Once you consider all these other factors I mentioned above, you can figure out exactly how many dollars you should save for retirement this year. But depending on what you make now, that could be 5% or 25% of your current income. (Or even more!)

The Solution

       So how, exactly, should you calculate how much you need to save for retirement? Well, I’d like to say that my handy little retirement calculator is the perfect answer, but it’s not. (It’s free by the way!)

       My calculator assumes you’re going to invest using a diversified portfolio of low-cost index funds (also a free calculator) with a moderate-slightly aggressive stock/bond mix. It also simplifies the taxes and doesn’t allow for “lumpy expenses” or significant changes in your retirement spending. Finally, it’s based on some other assumptions that I just can’t know will be absolutely correct. I did my best, but I know it’s not perfect.

       My free retirement calculator is certainly an improvement over these stupid % of income rules, but it’s still no replacement for sitting down with a good fee-only financial planner and working it out. So definitely try it out, but do yourself a favor and find a qualified professional to help you as well. And you need to do this more than once. Every few years you should revisit this plan with your advisor and update it as needed.

       I know that’s not an easy answer, but at least you’ll have a better chance of actually meeting your goals! Plus, I tried to make my calculator as simple as possible without making it too simple. And trust me, it’s better than most of the other free retirement calculators you’ll find out there because I used hundreds of thousands of Monte Carlo simulations to develop it. So it’s based on assumptions that mimic real market returns (which vary from year to year) instead of assuming a straight % return every single year (like 8%, 8%, 8%, …).

       Try it out, let me know what you think, and feel free to share your results here! What % of your income should you actually be saving to reach your retirement goals?

(photo credit: Nina Matthews)

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Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

21 responses to The Save 10% for Retirement Rule Is Stupid

  1. You hit it spot on! You see the precentaget rule/law everywhere and you end up feeling that you’re just not doing the things right with your finances. Recently, I have had to cash out some of my 401k equivalent to pay off some debts but it was agonizing because I kept thinking that I am breaking some financial laws. I prayed and prayed about it and came to the solution that it is better to use that money to pay off the debts (incurred by my husband’s failed busines) and not lose our home rather than have a fat 401k. After all, I will have a government pension and social security when I retire, and I have about 20 years to put more money into that 401k before I retire.

  2. Exactly, Lind. You have to look at your unique situation and figure out what’s best. Cashing out retirement assets early is usually a bad idea if you have other options, but it sounds like you didn’t and like you really needed the money.

    Dismissing the mainstream rules of thumb doesn’t mean you can come up with excuses to do other stupid things, but it does mean you start thinking for yourself and carefully analyzing what the best move is for you in your specific situation. Thanks for commenting!

  3. You’re absolutely right! Every rule of thumb out there really don’t account for individual situation so a lot of times, they don’t even apply. Thanks for the simple reminder!

  4. Thanks for commenting, Charles! I think it’s easy for us to get sucked into the easiness of these rules of thumbs. We want something simple, but we don’t realize the danger of applying these rules without question. This one in particular could be so detrimental to someone’s retirement plans. Yes, it’s better than saving nothing – but it’s far from the right solution!

  5. Sounds like the attack of another “stupid” financial rule! As you said, for anything more than very basic, general guidance, you need to do real research and calculations and probably see a professional!

  6. Yeah, Khaleef – I started thinking about these rules of thumb we have, how prevalent they are, and how ultimately useless they are as well. Seemed like I ought to write about it! I’ve got at least two more left, but I’ll probably be looking for some more eventually.

  7. I actually disagree. I don’t disagree with your basic premise that it is important to create a personalized plan for your retirement and that it is good to seek professional help to do so. I’ve made similar comments on my own blog.

    What I disagree with is you referring to it as a stupid rule. Dave Ramsey in particular focuses on helping people who are hundreds of thousands of dollars in debt with no retirement savings and no plan for the future. His focus is on getting them out of debt and on a plan. He also tells them to find a financial planner when they are ready to focus on retirement. He gets them off of center and on a basic plan and then passes them off to somebody who’s focus is more particular to retirement and future planning. There’s nothing wrong or stupid about that.

  8. Great article, Paul. This is something that I thought about heavily in the past before I realized the truth to it. I always tell people to find a retirement income calculator, such as the one on Bankrate’s website, to determine a percentage that would give them a set amount of desired annual retirement income.

  9. Thanks for commenting, Don!

    I agree with you about Dave Ramsey getting people to straighten out their finances, but I still think it’s wrong to tell them “Save 15% for retirement.” Here’s why – that’s his fourth “baby step”. By the time people have reached it, they’ve paid off all non-mortgage debt and have built up an emergency fund. At that point, they’re ready to meet with a financial planner. This is especially important because the rest of his baby steps require some thought and planning as well. Instead of saying “save 15% for retirement”, he could have said “meet with a financial planner to get your retirement planning on track”. Not as easy, I know, but it wouldn’t be wrong.

    For the vast majority of Dave’s fans, 15% is not going to be nearly enough unless they make some major changes to their concepts of retirement. These are people who mostly have done nothing for retirement up to this point and are often in their late 30s or early 40s (based on my observations). They’ve got a lot more work to do than to just start saving 15%.

  10. Thanks for commenting, Romeo! I’m glad you liked the article. Obviously, I agree with you that people need to calculate what they should save for retirement rather than guess and go with a nice, easy percentage. But the problem with most online calculators is that they assume the same investment return every year (and often a high one at that). An improvement would be to incorporate variable returns into the calculator. That’s why I tried to do with my retirement calculator and it worked out pretty good. It’s not perfect by any means. I had to make assumptions about inflation and I tried to simplify the tax parts so it wouldn’t become too complicated. But it’s certainly an improvement over your standard retirement calculators online.

  11. Paul,

    “…most online calculators..assume the same investment return every year”

    You are absolutely right. In fact, it gives me more thought into how I should direct my readers. We’ve seen over the last ten to fifteen years just how inconsistent mainstream market returns can be.

  12. There are still problems with the method I used, Romeo. I needed a way to simplify the calculator so users wouldn’t need to run thousands of simulations. I won’t go into detail here as to how I developed the calculator (though I’m happy to share). But mainly, I used Monte Carlo simulations to incorporate volatility into the calculations. The problem there is that I am assuming that a diversified portfolio will have the same risk/return characteristics as it did in the past. (I’m also assuming that people use the 120 – age in stocks rule and decrease their stock % as they get closer to retirement.) Monte Carlo simulations aren’t perfect, but they’re better than assuming 8%, 8%, 8%, … I used historical data because I’m not a very good fortune teller. :)

  13. you raise valid points. the only problem is i keep on stumbling over the word “stupid”. it does not help make your message clearer than it already is. in fact it muddles it. somehow i cannot reconcile it with a christian perspective.

  14. Thanks for your comment, juno. I hope you realize I am not calling any person “stupid”. That would not reconcile with a Christian perspective. What I am doing is analyzing an idea/rule of thumb and determining that the idea is stupid. Inasmuch as the save 10% for retirement rule is pointless when it comes to actually planning for your retirement, it’s a “stupid” rule of thumb.

    Honestly, I used the word “stupid” more to catch people’s attention than anything else. I actually didn’t use that word very often in the article itself. I hope you can see past the two or three times I used it to see that my points as to why the rule is useless are quite valid.

  15. Your preacher to the choir on this one – for those people reading your blog – you make 100% sense.

    HOWEVER, many do not know much about and do not care to read about finance and finance blogs. For these types of people I think it makes a lot of sense to just throw a number like 10% out there and HOPE that they go with it.

    If these people do not have someone throw any easy answer out there, they are apt to save nothing or close to nothing.

    For me personally, I see no value in calculating how much I should save. Why, I spend what I need to spend and save the rest. This is also why I personally see no value in creating a budget.

    Also, your calculator – for many/most people is way to complicated and much to much work. Thus if needed to use your calculator to determine how much to save – they would save nothing – as they would not use your calculator.

    Thus, for the masses in the United States, I think telling them to save 10% or 15% of their pay is absolutely the correct approach.


  16. Hi, David. I get what you’re saying. It’s the same reason the gurus give this advice.

    But this is my question, and the reason for the post: Is it really correct to encourage people to continue on in their ignorance?

    Imagine a person who hears this advice, doesn’t realize it’s limitations, but follows it as their retirement planning rule. Then they get to retirement and find they can’t live off of what they’ve saved. You think they’re going to be happy about that advice then? I kind of doubt it.

    Personal finance basics aren’t extremely complicated, but they’re not as simple as a single percentage for everyone either. The purpose of this article is to hopefully catch the attention of some of the misled masses and wake them up to the truth that it’s going to take a little bit more work than that to figure out what they should be saving. Yes, maybe my calculator is a little more complicated than what you’ll find on or some other simple retirement calculator. But it’s not rocket science either. For something as important as your retirement, you’re going to need to be willing to do a little bit of footwork. It shouldn’t take more than an hour to use my free retirement calculator. Do that once a year and you’re going to be light years ahead of a simple rule of thumb.

  17. I definitely agree with you, Paul.

    The missing variable is time, David. 10% of say, $2000 per month, will work wonders for a kid in her twenties assuming a 7% average annual return over thirty-five years. But it won’t work the same wonders assuming that the kid starts saving when she is fifteen years from retirement. Hence, Paul’s argument.

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