"Save 10%" Rule is So 1990

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)

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


Edit Your Comment

  1. Franklin Comes Alive! says:

    What exactly is the definition of saving too much? Having extra money in retirement is hardly a bad thing.

  2. skittlbrau says:

    Honestly, just saving SOMETHING puts you far ahead of the game. My parents have friends in their 50s with less saved for retirement than I have, and I am 24!

  3. Jozef says:

    15% is the maximum IRA contribution I can subtract from my taxable income, so that’s how much I’m saving directly for retirement. At any given point I’m saving up to 50% of my paycheck, but most of it is usually going for a large-ticket item saving, such as a new car or computer.

  4. Spider Jerusalem says:

    Um, saving is awesome or whatever.

    Do you HAVE to use that pic? Its grotesque.

  5. PatrickIs2Smart says:

    @spiderjerusalem: AGREED! Girlfriend’s car had an egg broken on the hood… she was parked under a tree in front of her house that some bird has taken residence in. Lucky me, I got to clean it off.

  6. Lordstrom says:

    If you’re saving for retirement, use IRA and 401k. You can get free money from them. Do not pass up the opportunity to get FREE money. At the very LEAST put money into your bank’s money market. Regular savings are pretty pointless longterm, but it is a good idea to have some liquidity.

    There are many better uncomplicated options than just stuffing cash under a mattress or leaving it in a silly .004% interest bank account.

    Oh, and pay off your credit cards every month.

  7. RandomHookup says:

    The one thing that many planners don’t take into consideration when building a plan is that you will usually slow down your spending the more you get past a certain point after retirement. Age and infirmity will often limit travel and wild spending after you’ve seen the world and played enough golf.

    Then it’s nothing put the early bird special and Matlock for the rest of your days.

  8. dgandy says:

    From the Fed Reserve (SF branch): http://www.frbsf.org/publications/economics/letter/2005/el

    The average american saves less than 2% a year. I think the last thing we need to be telling people is that we save too much.

    Japan on the other hand:

    Though it has fallen over the years. Why do you think you see all those japanese tourists with the cameras everywhere? bc they saved SO much money!

  9. NeoteriX says:

    Yeah, I’m not sure where the people suggesting that we’re over saving are coming from when you look at the national statistics.

  10. crnk says:

    @RandomHookup: You’re 100% on the right track, but there is one more GIGANTIC expense most people won’t have in retirement is a house. If you’re only paying taxes and bills on your house and not your $1000-5000 a month on your mortgage anymore, then you’re needing 12-60k less annually for that one specific expense.

    I can sure tell you I’d be fine in retirement with that 25% expense in my life gone and just living on 75% of my current income

  11. orig_club_soda says:

    How the hell are we supposed to save when we sp;end more on taxes than we spend on ourselves?

  12. tazewell78 says:

    Have you people ever heard of the paradox of thrift? In a nutshell, what would happen if everyone did this? The answer? Economic catastrophe. Try this for the layman’s explanation: http://www.ingrimayne.com/econ/Keynes/Paradox.html

    Japan’s savings rate is high? Great. Look where it’s gotten their economy in the last 15-20 years. The Japanese save because they have de facto price deflation, which incentivizes saving because falling prices increase buying power. Unfortunately, it also means that consumption falls and your economy heads for the talking toilet. Same thing for Europe, where people are realizing that the welfare state will collapse sooner rather than later and hence the need to save is greater. That, combined with an unhealthy love of unions, is holding back the EU economy in a major way.

  13. @Franklin Comes Alive!: I guess if the amount your saving for the future is adversly affecting you now then you’re saving to much.

    Living in a bad neighborhood to save on rent when you don’t really need to for instance or putting off going to the doctor.

    But I’m thinking when most people end up doing that it’s because they don’t have the money period.

  14. crnk says:

    How does that show anything about what you are saying? If you’re commenting that we pay a lot of tax, then you’re slightly misled, too. A nice little chart of global taxes will show what people really pay, and that it is usually a higher rate in comparable countries:

    Plus, if we spend more on taxes than ourselves, then why is tax day before the middle of the year? Is your car, healthcare, and house not for YOU?

    Lastly, we benefit when we are taxed. So if you’d rather not have a road system, environmental controls, corporate responsibility, and other government agencies that provide services for you, then you should start to argue for no taxes. Just remember that you’ll be the first without a road to get anywhere, you’ll live next to a smog-spewing factory, and you’ll have no recourse when you buy something defective, since those agencies won’t be able to do anything if they don’t exist.

  15. Greganda says:

    When experts advise what percentage of their income people should save (ignoring, for a moment whether it’s 10% or 50%), are they assuming gross dollars or net dollars? I imagine they mean the former, yes?

  16. NeoteriX says:

    I would assume so, but am not certain, only because usually when people sock away a % of their paycheck, they are taking advantage of some IRA/ROTH/Whatever pre-tax investment.

  17. bjcolby15 says:


    Whenever I read or hear someone mentioning that a company’s 401(k) matching “free” money for my 401(k), I ask myself, “do I work hard for that ‘free’ money? Do I respect my company’s mission? Do I respect my company’s decisions, even if I don’t agree with them? Do I come in on and give my ultimate effort, sometimes going above and beyond why my supervisors/managers ask? Do I resist goofing off, such as playing solitaire or talking on the phone?” When I can answer “yes” to all those questions, then the company’s “free” money is definitely free.

    Even one “no” should make you reconsider your contributions: monetarily to your plan, and careerwise your company, or both, because that “free” money your company is giving you will be wasted – or badly invested – money. It doesn’t matter if you contribute 1% or 30% to your retirement – if you’re contributing that much pay to your retirement account and can only muster the bare minimum in your job, come in thirty minutes late daily, giving the boss every excuse in the book of why the sales report is late or why a customer is complaining about your flip comments, rattle endlessly with your buddies about inane garbage, no amount of money you save will be enough to save your job. In fact, it will cost your company more to terminate you and have you removed from the building than giving you a 100% match in your 401(k) account.

  18. paco says:

    @Rectilinear Propagation: My savings rate, what little of it there already was, is about to go down appreciably since living in a transitional neighborhood is no longer an option.

  19. FLConsumer says:


    Just remember that you’ll be the first without a road to get anywhere, you’ll live next to a smog-spewing factory, and you’ll have no recourse when you buy something defective, since those agencies won’t be able to do anything if they don’t exist.

    How is this different from what we live in now? There’s roads, but they’re woefully inadequate where I live with no relief expected for 10 years… 10 more years of growth = gridlock, if we’re not there already. No recourse if I buy something defective? Already there. Just read Consumerist to see stories of people with broken crap that companies won’t stand by. Smog-producing factories? Already happening. There’s pollution warnings for much of Florida for the entire week, which is sad considering we have miles and miles of water surrounding the state.

    I’m not opposed to paying taxes, not even necessarily opposed to a high price tag, BUT, I want to get something for it! I have a serious problem with the way gov’t spends money, mostly wastes money, with no accountability. We’ve all incurred higher overhead as of late due to increasing supply costs, government is no different. BUT, the private sector has found ways to streamline their operations to make due. Government just increases taxes, or in the case of FL, offers a token tax rate break but the net effect is taxes going through the roof due to increased property values.

  20. Moosehawk says:

    This is something I was always told to try …

    The stock market is supposed to return around 12% interest annually. If you were to drop about $2,000 into the stock market, this amount would double every 8 years.

    If you didn’t touch that $2,000 for 56 years, it would have doubled 7 times (so long as whatever stocks you invested in didn’t go boom). Doubling that 7 times is $256,000.

  21. crnk says:

    Oh yes, those woefully inadequate roads….it takes HOURS to get across town, and none of them are paved. They are so poorly drained that they stay wet for days and turn into mud!

    Note that I said WITHOUT a road, not “with a road we paid too much for that doesn’t suit or needs.”
    We DO have consumer and citizen safety groups in the government. Ever hear of a recall? Do you know what happens when an airline ends service suddenly (here is a hint…you still get to travel)?

    Also, my original post was about where we would be without taxation, and the answer is without services. However, everyone always assumes that government don’t need incoming money to support themselves and the citizens.
    I think we can, as both a nation and individuals, afford to pay our taxes AND save enough money for retirement.

  22. raceroh says:

    There should be no excuse for not saving for one’s own future.The excuses are many but start small…$15.00 a week,$20.00,hell $10.00 ,what ever you can afford.Start with a passbook account very marginal interest at best but when you reach a threshold ($500,$1000) to buy into a better fund then do it.If you have the opportunity for direct deposit either from your bank account or paycheck to divert to your savings account(tra ira,roth,sep) then use it to its full extent.then as your wages increase over the years so should your deposits and 30 years down the road you’ll come to find out that $10.00 is a lot more than you could imagine.

  23. plonkee says:

    tazewell78 said: Same thing for Europe, where people are realizing that the welfare state will collapse sooner rather than later and hence the need to save is greater.

    I don’t think that the welfare state will collapse any time soon. In particular I don’t think we’ll be paying for healthcare and the state of our state pensions is no worse than the state of your social security system. In general, the welfare state is popular with voters over here. Everyone needs to save though.