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Is Saving 10% of Your Salary Enough for Retirement?

By Kailey Hagen - Jan 27, 2021 at 8:38AM

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Short answer: maybe. But only a custom retirement plan can tell you for sure.

Saving for retirement would be a lot less complicated if we could rely on a standard rule, like saving 10% of our annual income, but unfortunately, it's not that simple. There are several factors that determine how much you must save annually for retirement, and while 10% may be enough for some people, it won't be for others. Here's a closer look at why you shouldn't rely on this cookie-cutter rule and what to do instead.

Why saving 10% of your income may not be enough for retirement

Everyone's retirement will be different, so how much you must save is unique as well. Some people may plan for a quiet retirement at home while others will want to travel frequently. Some may spend only a decade in retirement while others could be retired for 30 years or more. These differences have a major effect on the cost of retirement and therefore on how much you have to save each year.

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Image source: Getty Images.

Then there's the fact that 10% of annual income looks different to everyone. If you're making $200,000 per year and saving 10%, or $20,000, you might have no problem retiring on your nest egg. But if you're earning only $30,000 per year and are saving just $3,000 of that for retirement, you're more likely to come up short.

What you invest in and how soon you begin saving for retirement matter a lot too because they determine how much money you'll get from investment earnings. While you can't predict the rate of return on your investments, you can control when you start saving. Beginning as young as possible is one of the best ways to ensure you'll be able to save enough because your earlier contributions will have the longest possible time to grow before you need to use them.

If you saved $500 per month beginning at 25 and you earn a 7% average annual rate of return, you'd end up with close to $1,236,000 by the time you're 65. But if you didn't start saving until you were 30, you'd have only about $856,000 by the time you're 65 if you saved $500 per month and earned a 7% average annual rate of return. In order to end up with $1,236,000, you'd have to start saving $722 per month beginning at 30 -- about $222 more than if you'd begun at 25.

Because there are so many factors at play in determining the cost of your retirement and the rate at which your savings will grow, you can't rely on a simple formula like saving 10% of your income. Below, we'll discuss how to come up with a personalized retirement plan that will give you a better idea of what you'll need.

How to figure out what you actually need for retirement

Estimating how much you need for retirement starts with the following questions:

  1. When do I want to retire?
  2. How long do I think I'll live?
  3. How much do I think I'll spend annually in retirement?
  4. How much money can I expect from other sources like Social Security, a 401(k) match, or a pension?

Once you have these basic questions answered, you can start piecing together a plan. Subtracting your estimated life expectancy from your chosen retirement age will give you a rough length of retirement. From there, you can estimate the total cost by multiplying your average annual retirement costs by the number of years you expect retirement to last, adding 3% annually for inflation. 

But you won't have to save all this money on your own because you'll have investment earnings and possibly money from one or more of the other sources discussed above. Talk to your employer to learn about any pensions or 401(k) matches you may qualify for and create a my Social Security account to estimate your Social Security benefit in retirement.

A retirement calculator can save you a lot of time by doing most of the math for you. It will most likely ask you about your estimated annual rate of return on your investments. It's best to stay conservative and use 5% or 6%, though your investments may grow more quickly than this. Once you've entered all your information, your calculator should give you some idea of how much you must save per month to meet your goal.

If you aren't able to save as much as you'd like, you can try reducing your expenses now or looking for ways to increase your income so you can afford to save more. Or you could redo your retirement plan, choosing a later retirement date or perhaps cutting some of your retirement expenses, like travel. Keep trying different scenarios until you find one that works for you.

There's nothing inherently wrong with saving 10% of your salary for retirement. It's a lot better than not saving at all. Go ahead and use that as a jumping-off point if you want. Just don't assume that's all you need to do. When you can spare a half hour or so, work out a custom retirement estimate as discussed above, and then alter your savings plan as necessary.

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