What is the 10% Savings Rule?

Why the 10% Savings Rule Doesn't Work For All

Ten Percent

The 10 percent savings rule says you should save about 10% of your income for retirement. I wish it was not referred to as a rule. If you have no idea how much to save, it gives you a starting place, but this is NOT a one-size-fits-all-rule; more of a general guideline that may or may not work for you.

In reality, the more you make, and the later you start saving, the more you need to save. So maybe if you started saving in your early 20’s and consistently saved 10% of everything you made, the ten percent savings rule would work.

But how many 20-somethings do that?

Most people find themselves in their mid 40’s or 50’s when they first give serious thought to saving for retirement. If that’s you, and your career is doing well, a 10% savings rate is probably not going to be enough. But 10%, or any amount of regular savings, is certainly better than none.

When doesn’t the 10% rule work?

Each and every one of you has a different financial situation; different ages, marital situations, pension amounts, careers, etc. There is no way one savings rule can apply to all those different situations.

In my article How Much to Save for Retirement I explain the four factors that do determine how much you need to save. It is an individual calculation that needs to be done.

If you are a high income earner, you will need to save much more than ten percent of your income if you want to maintain a similar lifestyle in retirement. An alternative to saving more would be a planned lifestyle downsize once you retire; that means a smaller home, less expensive cars, more home cooking, etc.

What if you can’t save 10%?

If you can’t save ten percent of your income, don’t get discouraged and give up. Take a good look at the facts and set a savings goal that you can achieve. If you are just recovering from a divorce, job loss, or death of a spouse, it is going to take time to get your finances in order.

Here are 8 Step to Starting Over Financially After 50.

If you can’t save enough because you are an over-spender you are going to have to get serious about living within your means. Check out 5 Types – And the Money Mistakes They Make to figure out what may be the cause of your over-spending.  You’ll also find insight in 5 Key Components to Your Relationship With Money.

Where should you save?

Once you’ve committed to saving, the question is where to put your money? The first thing to do is make sure you have an emergency fund. Once that is in place you can look at funding retirement accounts. Here are a few resources to help:

Could a 10% savings rate be too high?

Amazingly enough, some people save too much. By too much, I mean you have more than enough to retire and continue to live a comfortable lifestyle through your longest expected lifetime.  People that are in that situation and yet continue to forego any extras and save more each year are over-saving. Just as it is a struggle to get some people to save more, it can be a struggle to get over-savers to save less and use some of their money to go enjoy a few more things.

If you think you might be saving too much, walk through the steps in Enough to Retire? A Simple Calculation Delivers a Yes or No Answer to get a general estimate of how sufficient your current savings might be.