Deciding how to prepare for retirement can be pretty complicated, so it's tempting to follow some basic rules of thumb that you've probably heard lots of times. Unfortunately, listening to these generic rules could end up being a mistake that costs you.
Your best bet is to create a personalized retirement savings and investing plan based on your specific financial situation and personal goals. Whether you are ready to do that or not, though, there are a few key rules of thumb that you should likely ignore, even though you'll hear them repeated often.
Here's what they are.
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1. Try to max out your 401(k)
One of the first pieces of retirement advice that you should likely ignore is the advice to try to max out your 401(k). It's easy to see where this rule comes from. A 401(k) account can offer significant tax breaks, and it can be easy to sign up for since you just fill out some papers at work. In fact, many people are actually auto-enrolled in 401(k) plans now, so it can become easier to just contribute than to opt out.
Unfortunately, maxing out your 401(k) may actually not be the right approach to saving for retirement. Of course, you do want to contribute enough to the account to earn your maximum employer match -- if you're offered one. An employer match means your company puts in money when you do, so you don't want to pass up these free funds.
However, once you have maxed out your employer match, continuing to invest in your 401(k) until you max it out often does not make sense. The contribution limits are very high with this account -- $23,500 as of 2025, not including catch-up contributions available if you are 50 or over. If you're trying to max out this account, you may not have enough left to put into other tax-advantaged retirement plans.
Some of those other plans may be better than your 401(k). For example, if you have only a traditional 401(k) at work and expect you'll be in a higher tax bracket as a retiree, you'd be better off putting some money into a Roth so you can withdraw the money tax-free in retirement. And regardless of whether you have access to a traditional 401(k), Roth 401(k), or both at work, you should be aware of other downsides to these accounts as well. For example, you have limited investment choices in a 401(k), and some of the investments may have high fees.
Rather than following the rule of thumb and maxing out your 401(k), you may want to invest enough to earn your full match, then switch to a traditional or Roth IRA to get more freedom and flexibility. Once you've maxed out those other accounts, and an HSA if you're eligible for one, then you can go back to making 401(k) contributions if you still have extra funds.
2. Follow the 4% rule
The 4% rule is another common rule of thumb that you will hear often. This rule says you can withdraw 4% of your retirement account balance when you first retire, then adjust withdrawals by inflation each year thereafter. If you follow this rule, you should have around a 90% chance of your money lasting 30 years -- or so the conventional wisdom says.
The problem is, this may not be true. Morningstar experts have tested this rule and found that the actual safe withdrawal rate may be much lower than suggested. In 2021, for example, Morningstar found that 3.3% was a safe withdrawal rate. In 2022, the number was 3.8%, in 2023 it was 4.00%, and in 2024, it was 3.7%.
The assumptions upon which the 4% rule was built are outdated, and, unfortunately, if you do follow this rule, there's a good chance you could find yourself falling short of funds late in retirement. Instead of sticking with this rule of thumb, you may want to err on the side of being more conservative and choosing a lower withdrawal rate.
3. Aim to replace 70% to 80% of your income
Finally, the last rule of thumb you may want to ignore is the rule that you need to plan to replace between 70% and 80% of pre-retirement income. This is simply not going to be true for everyone.
Some people can get by with less and shouldn't push themselves to work longer than they need or want to on the basis of this generic rule. Others, especially those who want to travel or who have high medical expenses, may need to replace more income.
Instead of sticking with this blanket guideline, you should make a budget for what you want to spend in retirement and base your savings goals on how much you need invested to generate that amount of income. That way, you can create a personalized retirement savings plan that gives you the retirement that you want and deserve, not just a generic retirement savings plan that doesn't take your unique needs into account.
