DR 082: How Much Should You Be Saving for Retirement?

Exactly how much should you be saving for retirement? It seems that everybody has an opinion on this deceptively simple question. Actually, it is simple to answer, so long as you understand the implications of your choices.

To address this question, we are going to look at the standard rules of thumb on retirement savings. But we are going to go further. We are then going to look at the math and assumptions behind the rule of thumb. Finally, we cover those difficult situations where the assumptions don’t make sense for specific situations.

Rule of Thumb

The most common rule of thumb is that families should save 10% to 15% of their gross (before taxes) pay. Fidelity, for example, recommends that retirement savings eventually hit 12% of income. Liz Weston of MSN recommends saving 10% for the basics, 15% for comfort, or 20% to escape. An article on BrightScope written by CFP James Kinney recommends 15%.

The Math

So just how do these rules of thumb work? Why 10% to 15% versus some other number. To answer that question, let’s first look at the math. In this hypothetical example, we’ll assume the following:

  • A family makes $100,000 a year
  • The save 10%, or $10,000 a year
  • There is no inflation, so their income and annual savings amount remain constant
  • The earn 5% on their investments (remember, we are ignoring inflation)
  • The save for 40 years, from age 25 to retirement at 65

With these assumptions in place, this hypothetical family will, after 40 years, have accumulated about $1.2 million in savings. Here’s the math:

Retirement Nest Egg

Now we need to make a few more assumptions. First, we assume that in the first year of retirement our family can safely withdrawal 4% of their nestegg, or about $48,000. Second, we assume that they will receive about $33,000 in Social Security benefits (check out this calculator to estimate your benefits). And finally, we assume that the can maintain their pre-retirement lifestyle on about 80% of their pre-retirement income.

The result is, in year one of retirement, income of about $81,000.


As you may have noticed, the above required a lot of assumptions. Here are the key assumptions:

  • Save for 40 years
  • Save 10% of gross income
  • Earn 5% returns after inflation
  • Safely withdrawal 4%
  • Live on 80% of pre-retirement income
  • Receive Social Security benefits

It’s likely that for most people, one or more of the above assumptions will not hold true. Saving 10% for 40 years is, for example, unlikely for many. So what do you do when the assumptions underpinning this rule of thumb don’t apply to you? You change the assumptions and adjust your plan.

Changing the Assumptions

Let’s look at some common changes to the underlying assumptions that many will need to make.

Saving for 40 years

For many people, they have waited to point where they no longer have 40 years to save for retirement. For these folks, they may need to save more than 15% a year. There are several resources that can help you assess where you stand and what you need to do:

Money Ratios: In his book, Money Ratios, Charles Farrell walks through how much you should have saved based on your age and income. It’s a great way to assess where you stand and what you need to do to get back on track. I discussed his work on Podcast 31.

Early Retirement: For those late to the game, you can learn a lot from those that retired early. In Podcast 7, I interviewed Mr. Money Mustache. He retired at age 30 after just 9 years of work. The steps he took to retire young can help those who need to catch up on their retirement savings.

Saving 10 to 15%

For many people just starting out, saving 10% or more of gross income is a real challenge. In addition to paying school loans, many are starting a family and buying their first home. The key, however, is to get to this level (or more) as quickly as you can. If it seems like there’s no money left over to save, check out my One-N-Done method of saving money.

Earning a 5% real rate of return

We can’t control market returns. But we can control several very important factors. We can control our asset allocation (with an emphasis on equities for long term growth), we can control our investing costs, and we can control our behavior with the markets go crazy.

Five percent isn’t guaranteed. The actual returns over the next several decades may be higher or lower. But we should focus on what we can control.

4% Withdrawal Rate

The 4% withdrawal rate rule of thumb is commonly accepted as a reasonable approach to retirement spending. But it’s not without its detractors. Some believe future market returns will be insufficient to justify 4%. For more on this rule and its alternatives, check out Podcast 46.

The key is to evaluate the assumptions in light of your own circumstances. The answers may not be easy, particularly if you started saving late in life, but at least you’ll know where you stand and what you need to do.


And as promised, a listener named Ace sent in a picture of Harley, the mascot for the 82nd episode of the Dough Roller Podcast (you’ll get this if you listen to the podcast!):


Harley–Mascot for the 82nd Episode of the Dough Roller Money Podcast


Topics: InvestingPodcastRetirement Planning

4 Responses to “DR 082: How Much Should You Be Saving for Retirement?”

  1. carlyt

    You should save the maximum you can starting with your first job, take advantage of any employer matching plan, max out contributions when possible, eliminate debt, avoid risks with your nest egg and plan for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.). Use the information on the web to help. Most is free. I use several sites including Dividendchannel, Valueforum and the site Retirement And Good Living which provides information on finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics.

      • Trevor Miles

        I came across your site just now and was actually plugging some future value equations in Excel at work last week!
        Currently I bumped up my 401k to 22% for the 2nd half of the year and I dollar cost average into a target fund for 2040.
        I also tried to work out a future investment schedule assuming 2-3% income increases a year.
        I probably don’t have enough bonds but can have some risk for a few years

  2. Great post. I’m a fan of Charles Farrell and recommend his book. People need to be educated on how difficult the problem is. We don’t know how long we’ll live, market returns, Uncle Sam’s take down the road, or inflation. One area where people hurt themselves is they ramp up their standard of living to to great an extent when they progress in their careers and get salary increases.

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