For years, financial experts have urged employees to save 10% of their income and put it toward retirement. While 10% may be a simple and straightforward goal to pursue, in reality it may not be enough to fund a comfortable retirement.

While it's impossible to predict exactly how much you'll need during retirement, there are some simple rules of thumb that could help you get a ballpark estimate:

  • The rule of 25: For every dollar you need now to maintain your lifestyle, you'll need 25 times that amount saved by retirement, according to this guideline. For example, if your yearly expenses amount to about $50,000 now and you want to maintain that same lifestyle during retirement, you'll need to have roughly $1,250,000 saved by the time you retire.

  • The 4% rule: Another general rule of thumb is that you should withdraw about 4% of your total retirement savings during the first year of retirement. After that, you withdraw the same amount adjusted for inflation. So if you have $1 million saved, you'll withdraw $40,000 the first year. Assuming an inflation rate of 3%, you'll then withdraw $41,200 (that's $40,000 x 0.03) the next year, and so on. In theory, following this rule will allow your retirement savings to last at least 30 years.

Now let's see how saving 10% of your salary each year holds up to these guidelines once you reach retirement age.

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What 10% really looks like

The average income for Americans under the age of 65 is $46,409 per year. For those aged 25 to 34, it's just under $40,000 per year, and for 55- to 64-year-olds it's just under $50,000 per year.

So let's say, for example, you started saving 10% of your income at age 25 while earning a yearly salary of $40,000 and continued saving 10% per year until age 65, at which point you're earning $50,000 per year. Assuming a yearly rate of return of 7% on your investments, here's what your nest egg would look like by the time you retire at age 65:

Age Range Salary Total Amount Invested at End of 10-Year Period Cumulative Retirement Savings at End of 10-Year Period
25 through 34 $40,000 $40,000  $59,134
35 through 44 $44,000 $84,000  $181,374
45 through 54 $47,000 $131,000  $426,273
55 through 64 $50,000 $181,000  $912,462

So if you save 10% of your income each year and earn a 7% rate of return each year, you'll end up with about $912,500 by age 65. Now let's look at the rule of 25 and the 4% rule to see how that nest egg stacks up.

The rule of 25 considers your yearly living expenses (not your salary), so for this example, let's say you need about $40,000 per year to cover all of your expenses. According to the rule of 25, that means you'll need a nest egg of about $1 million to maintain your standard of living during retirement. In this example, you'd be a bit shy of that target, but not drastically so.

Now let's see how your $912,500 in savings would hold up to the 4% rule. You'd withdraw roughly $36,500 your first year. Assuming a 3% inflation rate, that number becomes $37,595 your second year, $38,723 your third year, and so on. Assuming your yearly living expenses amount to $40,000 per year, you may have to tighten your budget somewhat.

These calculations also assume you've started saving for retirement at age 25 and have consistently earned a higher salary while continuing to contribute 10% of your income every year. (In other words, it's essentially the best-case scenario.) If you started saving later in life, took a pay cut at some point in your career (or were unemployed for a significant period of time), or had to contribute less than 10% of your pay for a few years, you'll have to save even more to catch up.

Let's go back to the example above, but now let's assume you started saving at age 35 instead of age 25. To reach that same balance of $912,500 in the 30 years you have left before retirement, you'd have to save a whopping 20% of your salary every year. For every year you delay retirement savings, you'll have to save an exponentially greater amount of your income to reach your goal.

What about Social Security?

Many people save for retirement while banking on the fact that Social Security will help fill the gaps. And it's true that Social Security may bridge the gap between what you've saved by retirement age and what you need to retire comfortably.

The average retiree receives about $1,360 per month in Social Security benefits, or $16,320 per year. Assuming you receive the average retirement benefit for 20 years, Social Security will pay you a total of $326,400. Add that to the $912,500 you'll have saved, and it amounts to $1,238,900 -- well above what the rule of 25 recommends.

However, it's always wise to err on the side of caution when it comes to Social Security benefits. By the year 2034, the Social Security program is expected to face a cash shortage, according to a recent report by the Social Security Board of Trustees. While this doesn't mean that the program will be eliminated entirely, benefits may be cut by up to 25% if the program isn't reformed by then. And if you're counting on a certain amount in benefits each month just to cover your living expenses, you may be facing a cash shortage as well.

Saving 10% of your income is a great starting goal, and you'll be ahead of many other employees as well (less than 40% of employees contribute 10% or more toward retirement). But just because you're ahead of the average employee doesn't mean you'll have enough come retirement age. Socking away even a few extra dollars each week to save more than 10% can add up over time, and it may be enough to ensure you can live the retirement you've always dreamed about.

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