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Rules of Thumb: How Much Should I Save for Retirement?

Feb. 17, 2014
Investing, Retirement Planning
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By James Kinney

Learn more about James on NerdWallet’s Ask an Advisor

As a financial planner, this is one of the most common questions I receive. And it is not a very easy one to answer. As with almost everything to do with personal finance, it depends on the individual situation.  Still, rules of thumb can be handy, so let’s consider a few related to saving for retirement.

Save 15% of your pre-tax income

This is an excellent guideline for a younger person looking to get started. Indeed, anyone who starts saving 15% of their pay early in their career and invests those savings prudently will have a very high probability of retirement success.

However, there are some caveats. Older folks who are late to start saving will need to save more to make up for lost time. Those with generous employer pension plans can probably get away with saving less. Those with generous employer matching plans can perhaps get by with less savings than those who do not.

Save 8 to 10 times your final salary

This guideline looks toward the end result, rather than the periodic contribution, and the premise is fairly sound: Having retirement savings of 8 to 10 times your annual pay likely sets you up for a secure retirement. But, as with all rules, not everyone’s situation is the same. Those with a higher expected retirement income can likely get by with saving less, whereas those expecting no pension and lower Social Security payments may need to save more. And those who look forward to a more active retirement lifestyle need more savings than those who expect to spend their golden years as homebodies.

The primary flaw with this rule is that it is not very helpful to younger savers. After all, it leaves open the question of how much do you need to save to reach the desired level of savings. But it can be helpful to older savers who are within 10 years of their retirement date.

The 1, 3, 5, 8 rule

Fidelity did a study suggesting that an individual aim to save 1 times his salary by age 35, 3 times by age 45, 5 times by age 55, and 8 times his salary by retirement.

This rule provides useful guidance and milestones by which to gauge your progress, and so is a bit more useful than the previous rule. It allows for the power of compounding—that as your investment pool grows, investment earnings will cause the nest egg to start growing faster.

A potential flaw in this rule is that it relies heavily on savings during the last stage of your career. While that is what most people actually do, it is also quite risky to rely on your earning power late in your career. Older people who lose their job often have trouble regaining employment, which could make it very hard to achieve retirement savings goals.

Consult a financial planning professional

Rules of thumb are OK as a very rough guide, but they are no substitute for a sound financial plan based on your own unique goals and financial situation. Seek out the services of a fee-only Certified Financial Planner who can help you develop a personalized retirement plan. Fee-only planners can be found online at the National Association of Personal Financial Advisors ( or the CFP Board of Standards (