The personal finance rule-of-thumb regarding saving has historically been that each of us should sock away 10% of our salaries for retirement. But this old rule is coming under an increasing level of scrutiny from all sides — some saying we need to save more, some arguing that we’re already saving too much, and others replying there’s no one answer that fits everyone. Is it any wonder we’re all confused?

(Photo: Naquah)

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The “10% isn’t enough” camp is headed by one of the senior writers at Money magazine. He throws this out for consideration:

I wouldn’t discourage someone from using the 10 percent rule of thumb as a first step. If nothing else, this is a quick way to get into the habit of regular saving, which is the single most important factor in planning for retirement.

But since 10 percent likely isn’t adequate unless you get a very early start or believe you can count on other generous company perks – like a traditional check-a-month pension or employer-paid retiree health care, both of which are becoming increasingly rare – then I think it’s a good idea to at least try to raise your target to 15 percent.

In a subsequent piece, the same author again denounces the 10% rule, but gives a bit of a different take on the “right” answer:

So how much should you save, then? Well, you could use an online tool such as the Retirement Planner. By filling in data about your finances, you’ll get a sophisticated analysis of how much you need to save to retire comfortably.

But wait a minute — a Boston University professor and economic consultant says that online calculators have us saving too much:

I’m not saying everybody is oversaving. What I am saying is that online calculators advise most people to save too much. The same is true with the software that planners use. They start with the assumption that you need 70 percent to 85 percent of your current income to maintain your lifestyle in retirement.

The piece ends with the fact that the average American is on track to replace 58 percent of his or her income in retirement — far below what almost every personal finance writer, consultant, planner, and hack like us would advise.

Finally, there’s the “it depends” answer:

Before anyone can be a successful investor, they must first learn how to save. With that said, there are no pat answers to your question. The rule of thumb used to be to save at least 10% of your take-home pay. But the answer really depends on a number of variables. Just to name a few:

1. How much do you earn?
2. How much do you want to spend each year when you are retired?
3. How much do you want to leave your heirs when you die?

As you can imagine, the answers to 1, 2 and 3 are different for everyone, so there is no really good rule of thumb.

So where does this leave us? What is the right answer?

Though it’s the most complicated, the best method is to estimate your costs during retirement and then use conservative assumptions regarding rate of return to set your annual contribution. Again, there are many ways to do this, and we used several of them and took an average to set our retirement number (and thus our annual savings needed to reach it.) Be sure to revisit the numbers every few years to make sure your assumptions are still valid and that you’re on track to a happy and prosperous retirement. — Free Money Finance

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