Three Retirement Rules of Thumb

Three Retirement Rules of Thumb
Eileen St. Pierre, The Everyday Financial Planner

A client of mine, age 36, recently asked me how much money he should have saved for retirement at his age. That’s really an essay question but I know he wanted a multiple choice answer. I’m always hesitant to rely on “rules of thumb” because they can oversimplify the issue. But on the flip side, investing is such a foreign subject to many that I believe in this case rules of thumb can be a good place to start.

Here are three popular retirement rules of thumb:

Rule #1: Save 15% of your income per year for retirement.

This would include any employer match. If 15% is too tough for you to do right now, perhaps due to student loan payments, start somewhere. Then gradually increase the % each year. Put all your raises towards retirement.

  • If you got a late start towards saving, you may have to save more than 15%.
  • How much money you need in retirement depends on your lifestyle.
  • If you are one of the chosen few who still expects to receive a pension, then you may not need to save as much.

Rule #2: Create a retirement portfolio based on your age.

Vanguard founder John Bogle suggested putting (100 – age)% into stocks and the rest in bonds. As you age, money is shifted from riskier stocks into safer bonds. That makes a whole lot of sense.

According to this formula, if you are 40 years old, you would put 60% in stocks and 40% in bonds. But when you turn 50, you should have 50% in stocks and 50% in bonds. I consider this a conservative asset allocation strategy. Personally, I use (110 – age)% as my benchmark for stocks since I am more comfortable taking on risk.

  • This formula is easy to implement but you have to remember to rebalance your portfolio every year.
  • That’s where target date or lifecycle funds come in. They do this rebalancing for you. But they use a much more aggressive formula – probably closer to (125 – age)% in stock.
  • Adjust the formula to match your risk level. You won’t make it to retirement if you are too worried about putting your money in the stock market!

Rule #3: For a retirement benchmark, multiply your salary by age.

Now we are finally going to answer my client’s question. How much should a 36-year old have saved for retirement? Fidelity issues retirement savings guidelines using a very simple mathematical equation:


Fidelity Investments

So my 36-year old client should have saved at least 2x his current salary by now.

This analysis makes several assumptions:

  • You save 15% of your annual income for retirement.
  • You invest more than 50% of your retirement portfolio in stocks on average over your lifetime.
  • You retire at age 67.
  • You have the same lifestyle as you did before you retired.

If any of these assumptions do not hold, the amount you need for retirement will change. But at least it is a place to start. Just remember, life’s greatest questions are in the form of an essay, not multiple-choice problems.

Visit my Retirement Planning page for more information.