Money rules of thumb: Retirement edition

Thumbs upFor every rule of thumb, there are hundreds of people who would quibble with it.

We saw that just recently with a USA Today columnist who quantified exactly how much you need to save for retirement (his answer, via an analysis by T. Rowe Price: $82.28 a day). Lots of people didn’t like that the number was an estimate, an average, and that their own mileage may vary.

But many more people don’t have the patience, knowledge or energy to sort through all the potential factors for every financial decision. Sometimes, they just want an answer.

Over the next few days, I’m going to share the most helpful rules of thumb I know. They aren’t going to apply to everyone in all situations. But if you’re looking for guidelines (or guardrails), there are a starting point.

Let’s start with retirement:

Retirement comes first. You can’t get back lost company matches or lost tax breaks, and every $1 you fail to save now can cost you $10 to $20 in lost future retirement income. You may have other important goals, such as paying down debt or building an emergency fund, but you first need to get started with retirement savings.

Save 10% for basics, 15% for comfort, 20% to escape. If you start saving for retirement by your early 30s, 10% is a decent start and 15% should put you in good shape for a comfortable retirement (these numbers can include company matches). If you’re hoping for early retirement, though, you’ll want to boost that to at least 20%. Add 5-10% to each category for each decade you’ve delayed getting started.

Don’t touch your retirement funds until you’re retired. That pile of money can be tempting, and you can come up with all kinds of reasons why it makes sense to borrow against it or withdraw it. You’re just robbing your future self.

Keep it simple–and cheap. Don’t waste money trying to beat the market. Choosing index mutual funds or exchange-traded funds, which seek to match market benchmarks rather than exceed them, will give you the returns you need at low cost. And cost makes a huge difference. If you put aside $5,000 a year for 40 years, 1 percentage point difference in the fees you pay can result in $225,000 less for retirement.


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  1. Of these, the third one is probably the most important. I remember a number of years ago when my wife wanted me to withdraw money from my 401K to pay for a new house. Her argument was that “so-and-so did”. I argued that I would have to pay the taxes plus the 10% penalty and that money plus the interest would no longer be there for retirement. Ultimately, we didn’t take the distribution and are thankful that we didn’t.

    On the fourth rule, keeping it simple doesn’t mean to invest and forget. It is still important to revue your portfolio periodically to make certain that invested appropriately. My wife, who was a bank clerk, invested primarily in CDs and had a characteristically low rate of return. I invested mostly in stock funds and had a much better return. These days, my focus is on capital preservation and income rather than growth. Electrical utilities have been good stable investments for years, but regulatory changes and the growth of distributed generation may change that. You might think that a utility with nuclear generation would be a better investment than one with coal fired generation. The problem is that you can’t convert a nuclear plant to natural gas. I still have a few individual stocks, but am now invested mainly in low cost funds.

  2. Maureen Anne says:

    I love rules of thumb on almost any topic but especially money. My dad taught me to
    “spend no more than <36% of your pretax monthly income (which includes your Mortgage) " So we try to do after tax.
    Pay your mortgage off by age 55.

  3. Jim McCorkell says:


    I admire you and really respect what you are doing. But it drives me nuts when you say something ridiculous like each dollar saved today will result in $10-20 of income in retirement. That is not even close to mathematically possible. Either you don’t know that, or you’re deliberatively deceiving people. Which is it?

    If you put a dollar into retirement and it simply kept up with inflation (which is actually somewhat hard to accomplish), and you drew only 4% from your savings (as you and most other financial “experts” recommend) it would take 25 years for someone to even get their full dollar back. If you retire at 65, that means you would be 90 before you’d even get your original dollar back. How on earth do you think someone could or would actually collect $10 or even $20 back?

    • Liz Weston says:

      Any investment calculator can show the value of long-term compounding. I usually use 8% as an average annual return, since that’s the long-term average for the stock market (which is, BTW, the only investment class that consistently outpaces inflation). You can use lower returns and still see the long-term effects of compounding, though–the longer you leave the money alone to grow, the more you have in the end, with more dramatic increases the longer you wait. Inflation will take its cut, but twenty bucks 40 years from now will still be worth well more than $1.

  4. So how do you reconcile the $82.28 figure with the 10/15/20% rule? Unless you’re making $200,000 a year, $82.28 a day is a LOT more than 15% of your income. You can’t get out of it by saying “it’s an average,” because two different numbers can’t both be average.

  5. When you say 10% should be enough if you start in your early 30s, 10% of what? Gross income, net income? If you’re a working couple, total gross or total net? Also, I know this is supposed to be a rule of thumb, but after all the deductions for my health, dental and vision insurance, flexible spending accounts, and retirement savings, my net income is much, much less than my gross income. But, it’s my take-home pay that I live on.

    • Liz Weston says:

      All the numbers are based on gross income. If you can’t get close, just start somewhere, and try to bump it up as often as you can.