How much should you save for retirement? If you are like most Americans, you probably aren’t quite sure, though you’ve heard that 10% is a good amount.
The “10% rule”—i.e., save 10% of your income for retirement—is perhaps the most well-known financial rule of thumb.
However, the rule has many critics who insist, for instance, that a 10% savings rate is not enough to get you through retirement.
Are they right? As is always the case with trying to apply rules of thumb to your own life, the answer is “maybe.”
Individual factors—such as your current savings, current and future income, and desired spending in retirement—all influence how much needs to be saved for retirement.
You may personally need to save more or less than 10%, but it turns out there may be some valuable wisdom embedded in this rule of thumb that has been missed by critics of the rule.
In a recent analysis with my co-author Michael Kitces, we found that prior studies that had criticized the 10% savings rate as being too low to safely save for retirement were based on some assumptions that did not accurately depict some of the earnings dynamics individuals appear to experience throughout their career.
In particular, critics of the 10% rule tend to assume that individuals have constant inflation-adjusted earnings throughout their career.
However, this doesn’t appear to align with research on earnings across one’s career—and particularly the high levels of inflation-adjusted earnings growth early in one’s career and the decline in earnings experienced near retirement.
Once these dynamics are accounted for, saving rates of 10% or less were “safe” for all but the highest earners over 40-year savings periods based on historical market returns and income provided by Social Security.
Further, for the lowest-earning Americans, Social Security alone was sufficient for retirement, while earners at the 90th percentile had a safe savings rate of 13.1%.
In contrast to claims of 10% rule critics and particularly past calculations which suggest that safe savings rates need to be much higher than 10%, our findings suggest that, at least historically, savings rates of 10% or less were perhaps not as “irrational” as previously assumed, while rates as low as 0% may have even been “rational” for some lower-income individuals.
Yet, consistent with some critics of the 10% rule, we do find that how long you have left to save for retirement matters.
For those with only a 30-year horizon for saving, safe savings rates ranged from 0% at the 10th percentile of lifetime earnings to 15% at the 80th percentile.
And for those with only a 20-year horizon for saving, safe savings rates ranged from 0% at the 10th percentile to 25% at the 80th percentile.
It is important to note that these findings are only backward-looking and there is no guarantee the future will be the same. It is always best to use a savings rate that captures the unique dynamics of your own situation, but it can also be useful to acknowledge the wisdom that can be embedded in rules of thumb—and particularly when we may find ourselves encountering advice that is in stark contrast with conventional wisdom.