Does the 10% Rule For Retirement Work?

Retirement planning involves several factors that make it challenging to estimate the required savings. Your objectives and life expectancy are essential in making an informed prediction.

Setting aside a sum equivalent to ten times your annual earnings is often recommended. It is important to consider that this approach may not work for everyone.  

Why save ten times your annual salary?

Fidelity suggests that people save around ten times their yearly salary when they reach retirement age to have enough money to last the remainder of their life. However, this estimate is based on several assumptions, including:

  • You intend to retire and collect Social Security at the age of 67.
  • You anticipate living to be 93 years old.
  • You put at least half of your money into equities.
  • Beginning at 25, you save 15% of your annual income.
  • You have consistent 1.5% real salary growth.
  • You intend to continue living your pre-retirement lifestyle in retirement.

Even if you satisfy all of these requirements, there is a 10% risk you may run out of money too soon. Few people will tick all of these boxes.

Some people cannot afford to retire at 67, while others are compelled to retire at a younger age owing to illness or job loss. Some people survive to 93, while others die of unforeseen grave diseases. Some retirees want to spend thousands of dollars on trips, while others want to stay close to home. These decisions substantially impact how much retirement costs and, as a result, how much you need to save.

So, how much money should you put aside?

To estimate your retirement savings target, a good baseline is ten times your current salary. However, it’s important to consider any differences in your retirement plan that may require adjustments to this amount. Fidelity estimates that if you expect to retire at 70, you may only need eight times your yearly income, and if you choose to retire at 65, you may need as much as 12 times your yearly earnings to support yourself.

The same is true for the other parameters mentioned above. You’ll need more money if you anticipate living longer than 93 years but less if you don’t. You can save less if you intend to cut your expenditure by at least 15% in retirement. However, you will require more funds if you want to increase your spending.

Remember that the aim is to save around ten times your yearly income by the time you retire, and your income may be higher by then than it is now. Additionally, you may also have to deal with future Social Security benefit cuts, which might put an even bigger strain on your funds.

When in doubt, always overestimate how much money you need to save. If you don’t need all the money you saved for necessities, you may always use it for luxuries like travel and hobbies, or you can leave it to your heirs when you die.