What Is the 10% Savings Rule?

Why the 10% Savings Rule Doesn't Work for Everyone

Woman using a calculator to track savings and spending

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The 10% savings rule states that you should save about 10% of your income for retirement. If you have no idea how much to save, it gives you a starting point, but it isn't a one-size-fits-all rule. You should treat it as more of a general guideline.

Below, you'll find a full explanation of the 10% savings rule, including who it's designed for, who needs to save more, and what to do if you can't put aside 10% of your income.

The Ideal Implementation of the 10% Rule

The 10% rule works best for workers who secure a well-paying job in their early-to-mid 20s. For those workers, the 10% rule should be a good guide that leads to a fairly comfortable retirement. It may not be the perfect guide, and you should continually reassess your savings strategies. However, for those in their 20s trying to grasp the basics of retirement savings, the 10% rule is a fine way to start putting away funds for the future.

This rule of thumb should be considered along with other rules of thumb to give you an overall idea of your ideal financial picture. For example, Fidelity recommends saving up one year's worth of income in a retirement account by the time you turn 30, three times your salary by age 40, six times your salary by age 50, and eight times your salary by age 60.

For someone who starts saving from scratch at age 25, Fidelity recommends saving 15% of their income to reach these goals.

When the 10% Savings Rule Doesn't Work

In reality, the more you make, and the later you start saving, the more you need to save. The ideal savings scenario is far from the norm. A report from the Federal Reserve found that 64% of working adults in 2018 weren't on track for their retirement savings goal, and 25% didn't have any retirement funds set aside.

Some people wait until their 40s before they even begin to seriously consider their retirement savings. For those people, setting aside 10% of their paychecks won't be enough to hit their retirement goals.

Even if the 10% rule won't fit your situation, any amount of savings is better than nothing.

The issues for late-starters can be exacerbated by lavish spending habits. If you get accustomed to big homes, fancy cars, and frequent travel, then you'll likely want to extend those living standards into your retirement years. However, doing so will require significantly more savings than those who are content to live meagerly.

Where Should You Save?

Knowing that you should save is one thing, and knowing where to save that money is another issue. If your savings are starting from scratch, your first priority should be to create an emergency fund. An emergency fund can help you avoid debt, and they reduce the temptation to reach for your retirement savings before you actually retire.

Once your emergency savings are in place, you can focus on funding retirement accounts, such as a 401(k) or in a traditional or Roth IRA. These accounts have their differences, but they're all tax-advantaged accounts that reward people for saving towards their retirement. There are strings attached to those tax breaks, though, including a 10% penalty tax on most withdrawals before age 59½.

What If You Cannot Save 10%?

If you cannot save 10% of your income, you should not get discouraged. You should take the time to assess your financial situation 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. You can expedite your financial recovery by carefully considering steps you can take to set yourself on a successful path.

For example, if you've struggled with overspending in the past, and that has hampered your savings, this can be an opportunity to scrutinize your expenses. You can look up budgeting and saving tips to help you determine why you overspend and how to curb those habits. Using tactics such as weekly allowances could also help you reduce your spending and prioritize savings.

The Bottom Line

There are plenty of guidelines like the 10% savings rule, but they don't tend to account for a person's unique financial circumstance. The details of your financial life will have a bigger impact on your savings than a generalized rule of thumb.

You can find calculators online that can help you drill down on your finances and provide a more accurate estimate of how much to save. However, there's no substitute for meeting directly with a financial planner who can assess your financial circumstance and help create a savings plan that will set you up for success later in life.

Article Sources

  1. Fidelity. "How Much Do I Need to Retire?" Accessed May 30, 2020.

  2. Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2018," Page 4. Accessed May 30, 2020.

  3. Internal Revenue Service. "Exceptions to Tax on Early Withdrawals." Accessed May 30, 2020.