Confused About the Retirement Savings Rule of Thumb? How the Main Rules Fit Together

Why Do So Many People Feel Confused About the Retirement Savings Rule of Thumb?

If you're confused about the retirement savings rule of thumb, you have good reason to be. There isn't just one rule. There are several, and each one answers a different question.

Picture your next paycheck. One rule says how much of it to save. Another says what total to build by the time you stop working. A third says how much you can spend after that. A fourth says how to split your money between stocks and bonds.

So the four questions are how much to save, how much to build, how much to spend and how to invest. Two helper tools belong to the "how much to build" question. One is an income replacement rule. The other is a set of age checkpoints.

We'll take each one in turn. The rules mostly answer different questions, so they rarely clash head-on. They can still give you different starting numbers. Two versions of the withdrawal rule, covered later, are one example. Every estimate needs testing against your own life. Once you see which job each rule does, most of the confusion goes away.

The Retirement Rules at a Glance

Here is a quick map of the rules in this guide. Each row answers one question. The sections below explain each rule and show the math.

Only the first row is something you act on every month. The others are checks. That difference shapes which rule to act on first, which we cover near the end.

How Much of My Income Should I Save for Retirement Each Year?

Start saving as early as you can. If you start late, save a bigger share. An early start gives your money more years to grow.

Brookings is a US research group that studies public policy. It warns that 10% will be too low if you are older and haven't started saving. In that case, it says to think about at least 15% to 20%.

The right share depends on when you start. A later start calls for a higher rate. Take two made-up savers, one starting at 25 and one at 45. If both retire at the same age, the late starter's dollars get 20 fewer years to grow.

Here is a practice example. Suppose you are older and haven't started retirement saving. You earn an assumed $4,000 a month before tax.

At the 15% low end of the Brookings range, you would save $600 a month. At the 20% top end, you would save $800. Only the pay is assumed here. The percentages come from Brookings.

What if you are younger and not starting late? Our sources give no set rate for you. The Brookings range covers older late starters only. So here is a simple plan instead. It is our opinion, not a tested result.

• First, save at least enough to get your full employer match.
• Then raise your rate a little each year, as your budget allows.

An employer match is money your job adds to your account when you save. It counts toward your total. Skipping it means leaving part of your pay on the table.

This match-first plan is for younger savers. Late starters should use the higher range above instead.

Is 15% of Income Enough to Save for Retirement?

It can be, but no single rate suits everyone. For an older late starter, it is only the bottom of the Brookings range in the section above. A late starter may need the top of that range or more.

Whether any rate works depends on when you start, what you'll spend and what other income you'll have.

A younger saver may reach the goal with less than a late starter needs. You can find out with a simple test. Work out your 25x target, then project your savings forward. The checkpoint section below shows how, step by step.

If the projection lands near your target, your rate is likely fine. If it falls short, raise your rate or plan to work longer. Run the test again each year, because your life and the markets will change. Use our free financial calculators to test your saving plan against your own goals.

What Is the 25x Rule for Retirement Savings?

The 25x rule says to save 25 times the yearly amount your savings must provide in retirement. That amount is your planned spending minus your other income.

Other income is money that comes in without drawing on your savings. It often means a pension, which is a regular payment from a former employer's plan. It can also mean Social Security, the US government's monthly retirement benefit.

This finish line is also what age checkpoints aim for. So it's worth getting right.

Here is a teaching example, not advice. Suppose your savings must provide $40,000 a year after other income. Multiply by 25. Your target is $1,000,000.

The rule uses spending, not salary. Someone who earns a lot but spends little needs a smaller target. Someone who spends most of a modest pay needs a bigger one than their salary suggests.

The rule can also overstate what you need. It assumes the same spending every year, raised only for prices. Many people spend less on travel and hobbies as they get older. Health costs can climb, though. So plan for both.

The 25 comes from the 4% withdrawal rule that AARP describes. AARP is a large US nonprofit for older adults. A total 25 times your yearly gap lets that rule's first-year withdrawal cover the gap exactly.

What Is the 4% Rule for Retirement?

The 4% rule is a spending guide. As AARP describes it, you take out 4% of your savings in your first year of retirement. Each later year, you raise that dollar amount by the inflation rate. Inflation means prices rising over time.

Say you start with an assumed $500,000. Year one is $20,000. Year two is $20,000 plus a raise for inflation. It is not a fresh percentage of whatever balance is left.

Here is why that matters. Suppose prices rise an assumed 3% in your first year, and the market falls. Year two is still $20,600, because $20,000 × 1.03 = $20,600. Your paycheck from savings follows prices, not the market.

Now compare a lower start. Morningstar researchers have re-checked the rule with more recent market data. As AARP reports, they put the highest safe starting rate at 3.7% for a 30-year retirement.

On the same assumed $500,000, 3.7% is $18,500 in year one. That is $1,500 less a year, or $125 a month. In our view, that gap is worth testing against your budget before you retire.

The 4% rule is a planning guide. It does not promise your money will last. AARP lists it among long-held rules worth questioning.

It also differs from the 100 minus your age rule. The withdrawal rule tells you how much to take out. The age rule tells you how to invest what stays behind.

What Is the 80% Rule for Retirement Income?

The 80% rule says to aim for savings that replace about 80% of your work income each year once you retire. That is how AARP sums it up. It is a starting point, not a promise.

Why less than 100%? Some costs stop. You no longer save for retirement or pay to commute. Other costs may grow, such as health care.

Here is an assumed example, using our own arithmetic. Suppose you earn $60,000 a year. The rule gives about $48,000 a year, because 0.80 × $60,000 = $48,000.

That $48,000 is a rough target for all your retirement income. It is not just what your savings must pay. Here is the full sequence, with assumed numbers.

1. Your total income goal is $48,000 a year.
2. Say you expect $18,000 a year from a pension or Social Security.
3. Subtract that, and $30,000 is left. That is the gap your savings must fill each year.
4. Multiply the gap by 25. Your 25x savings target is $750,000.

Even AARP asks whether rules like this one are due for retirement themselves. So test the rule against your real budget, not your salary. A list of your actual monthly bills beats any percentage.

How Much Should I Have Saved for Retirement by Age 30, 40, 50 and 60?

No fixed dollar amount fits every 30-, 40-, 50- or 60-year-old. Your checkpoint is your own 25x finish line. At each of those ages, project your savings forward and compare. The steps and worked example below show how.

You may also see age charts online. Each chart rests on its own guesses about when you retire and how fast money grows. If you use one, read the assumptions printed under it.

Age checkpoints you can work out yourself

Here are checkpoints built with assumed numbers. Take the $750,000 finish line from the practice example below. Use a retirement age of 65.

Assume your savings grow 5% a year after inflation. Assume you add nothing more. "After inflation" means the growth left over once rising prices are taken out.

These guideposts come from our own arithmetic, not from a source. New deposits lower each number. A lower growth guess raises it.

The sourced numbers this guide uses

For quick reference, here is where the real figures come from. The late-starter saving range comes from Brookings, covered in the saving-rate section. The 4% and 80% rules come from AARP. The 25x target follows from the 4% rule. Everything else in this section is an assumption or our own math.

How we did the math

You can check every projection in this guide with two standard formulas. A balance you already have grows like this: balance × (1 + rate) raised to the number of years. In plain terms, multiply by 1.05 once for each year at an assumed 5%.

Deposits made at the end of each year use a second formula. Multiply the yearly deposit by ((1 + rate) to the power of the years, minus 1), then divide by the rate. The checkpoint table above runs the first formula backward. It divides the $750,000 target by 1.05 raised to the years left.

Every rate in these examples is a growth rate after inflation that we assumed. None is a forecast. A spreadsheet's FV function or your plan provider's calculator gives the same results.

Build your own checkpoint

Start with the age you plan to retire. A later retirement gives you more years to save. It also means fewer years your money must last.

Next, estimate your yearly spending in retirement. Subtract other income, such as a pension or Social Security. Add room for taxes and health costs. Multiply what is left by 25. That is your finish line.

Here is a practice example with assumed numbers. Suppose you expect to spend $50,000 a year and get $20,000 from other income. The gap is $30,000. Times 25, your finish line is $750,000.

Run the same check at 30, 40, 50 and 60. Each time, ask one question. At your current saving rate, are you on a path to that number? Your plan provider's calculator can project the growth for you.

How the projection works

Here is the math, with assumed numbers. Say you are 40 with $150,000 saved. You plan to retire at 65, which is 25 years away. Assume your savings grow 5% a year after inflation.

We picked that growth rate only to keep the math simple. It is not a forecast, and no source gives it.

First, grow today's balance. At the assumed 5% for 25 years, $150,000 becomes about $508,000. That is our own compound-growth arithmetic.

Next, add new savings. Say you put in $6,000 at the end of each year. At the same assumed 5%, those deposits grow to about $286,000.

Add the two, and you reach about $794,000 by 65. Compare that with the $750,000 finish line. In this example, you are slightly ahead.

Test a lower growth guess

Now run the same saver at an assumed 3% a year after inflation. The $150,000 grows to about $314,000. The $6,000 yearly deposits grow to about $219,000. Together that is about $533,000, roughly $217,000 short.

What would close that gap? Our own arithmetic gives the answer for this made-up saver. Each extra $1,000 deposited yearly at the assumed 3% grows to about $36,000 over 25 years. So roughly doubling the yearly deposit, to about $12,000 in total, would close it. Retiring a few years later is the other lever.

So the growth guess alone changes the verdict. With the assumed 5% rate, this saver looks ahead. With the assumed 3% rate, the same saver falls behind. That is why one projection is not enough. In our view, plan around the lower result and treat anything better as a bonus.

If you're behind

Raise how much you save. Late starters can use the Brookings range from the saving-rate section as a floor. If you are younger, get your full employer match and raise your rate a little each year.

Don't chase risky returns to catch up. A big loss close to retirement leaves little time to recover.

What Is the 100 Minus Your Age Rule for Investing?

Subtract your age from 100. The result is a rough share of your savings to keep in stocks. The rest goes in bonds. This is a widely repeated rule of thumb, not a figure from our sources.

Stocks are small pieces of companies. They tend to grow more, but their prices swing more. Bonds are loans you make to a government or company. They usually pay smaller, steadier returns.

Take an assumed age of 30. The rule gives 100 minus 30, or 70% in stocks and 30% in bonds. At an assumed age of 60, the same math puts 40% in stocks. This is the rule's rough arithmetic, not a tested result.

The idea is simple. Young savers have time to ride out drops in stock prices. Older savers have less time, so the rule shifts them toward steadier bonds.

This rule sets your mix, not your amount. It says nothing about how much to save. If you want more in stocks, you could start from a number bigger than 100. At an assumed age of 30, our arithmetic gives 110 minus 30, or 80% in stocks instead of 70%.

One Worked Example: How the Rules Fit Together

To see the rules side by side, meet Maya, a made-up saver. She's 34 and earns an assumed $60,000. Her job offers an employer match, which is also an assumption. She has only about one month of bills saved in cash.

In this fictional chat, she asks a friend, “One rule says save a share of my pay, another says have 25 times something. Which one is right?” The friend replies, “Both. One is what you put in each month. The other is where you're headed.”

Here are her numbers. Her age, income, other income and saving rate are assumptions. The 80% and 4% figures come from the rules AARP describes.

• Income goal: the 80% rule on her assumed $60,000 gives a rough $48,000 a year (0.80 × $60,000). She assumes $18,000 of that will come from Social Security. That leaves a $30,000 gap for her savings to fill.
• Savings target: 25 times the $30,000 gap is $750,000.
• Saving rate: her assumed saving rate of 15% is $9,000 a year, or $750 a month.
• Stock mix: the age rule uses her assumed age of 34. Subtracting that from 100 leaves a rough two-thirds of her savings in stocks and the rest in bonds. In this made-up example, that is a rough guide, not a recommendation.

Then Maya hits a snag. Her cash covers only about one month of bills. If she puts the full $750 a month toward retirement, a car repair could end up on a credit card.

So she makes a tradeoff in this made-up plan. For six months, she saves an assumed 10% for retirement. On her assumed pay, that is $500 a month. The other $250 a month goes into cash.

We also assume that $500 still earns her full employer match. Real plans set their own match rules, so check yours.

What does the pause cost her? Over six months, $1,500 less goes into retirement. Assume that money would have grown 5% a year after inflation until she turns 65, about 31 years away. Our arithmetic puts the loss at roughly $6,800 by 65. That is a small slice of her assumed $750,000 target.

Her cash goal, another assumption, is three months of bills. Once she reaches it, she moves back up to her original assumed rate. Waiting costs her a little growth. It also keeps one surprise bill from undoing her plan.

What if the plan gets hit early? Suppose an assumed $900 repair arrives in month two and empties her new cash. She does not stop saving for retirement. She keeps the assumed 10% that earns her match and restarts the cash goal from zero. The plan bends instead of breaking.

Our guide on how to save for several goals at once shows other ways to split money like this. When her cash goal is full, our guide on what to do after your emergency fund is full covers where the extra money can go next.

The tradeoff would look different if Maya expected a pension. Suppose, as another assumption, a pension paid $10,000 a year on top of Social Security. Her gap would drop from $30,000 to $20,000. Times 25, her target would fall from $750,000 to $500,000.

With a smaller target, staying at her lower rate a little longer would cost her less. She could fill her cash cushion with less worry about falling behind.

In the end, Maya stops hunting for one winning rule. She acts on her saving rate now. She uses the other rules as a yearly check.

Do Retirement Rules of Thumb Work for Everyone?

No. Retirement rules of thumb are starting points built on average guesses. Your life may not match the average. Adjust if you fit one of these groups.

• Late starters. Use the higher Brookings range from the saving-rate section, not a younger saver's match-first plan.
• Early retirees. Your money must last longer than a typical plan. The 3.7% starting rate in AARP's report was for a 30-year retirement, and yours may run longer.
• People with high health costs. You may need more income than the 80% target AARP describes.
• People with a pension. Your savings target may be much smaller than your salary suggests, as Maya's example shows.

What has changed in the rules

AARP has asked whether the 4% withdrawal rule and the 80% income rule should be retired. The Morningstar re-check in the withdrawal section is part of that debate.

We took those figures from AARP's article. We did not test them ourselves. Treat the change as fine-tuning. It is not a reason to save less.

Which rule matters at your stage

Check each rule's guesses, such as a 30-year retirement, against your own plans. In our opinion, your stage of life decides which rule matters most.

• If retirement is decades away, focus on your saving rate. Leave the withdrawal rule for later.
• If you are within about ten years of retiring, test the withdrawal and income rules against a real monthly budget.
• If you expect a pension, work out your 25x target from the gap, not your salary.

Which Retirement Savings Rule of Thumb Should You Act On First?

Act on your saving rate first. That is our opinion, not a tested result. Your saving rate is the share of each paycheck you put toward retirement. It's the one rule you control every month.

If you're still confused about the retirement savings rule of thumb that matters most, this is the one to start with. Target totals and age charts rest on guesses about growth and inflation. Your saving rate is the part you control. Whether it reaches your target still depends on those guesses.

So review your rate each year. Review it again when returns, inflation, your retirement age or your expected spending change.

If you are older and haven't started retirement saving yet, Brookings suggests a rate of at least 15% to 20%. That range is for late starters only. Younger savers can follow the three steps below and raise their rate over time.

Here is a simple order to follow:

1. Cover essential bills and urgent cash needs first. Our guide on saving for retirement or an emergency fund first covers this step.
2. Get any employer match.
3. Raise your rate a little each year.

What if your budget can't reach the full match yet? Start with whatever small amount you can manage. Then pick a date, a few months out, to raise it. A small start still builds the habit.

One easy habit helps with step three. Raise your rate on the same day each year, such as when you get a raise. The bump is easier to accept when your pay goes up too.

Conclusion

If you were confused about the retirement savings rule of thumb, here is the fix. Each rule has its own job. One tells you how much to save. One sets your goal. One guides spending, and one shapes your investment mix.

Here they are in plain words:

• Save a steady share of each paycheck.
• Aim for a total based on your spending.
• Spend your savings with care once you retire.
• Shift toward bonds as you age.

Pick your saving rate this week. Then check your progress against the other rules once a year.

This article is general education, not personal advice. A fee-only planner is paid by you rather than by product sales. One of them, or your plan provider, can run your own numbers.