Why Saving 10% Won’t Get You Through Retirement

Changing how much you save builds your retirement income

Retirement experts and financial planners often tout the 10% rule: to live comfortably in retirement, you must save 10% of your income. The truth is that—unless you plan to go abroad after ceasing to work full-time—you will need a substantial nest egg. And saving 10% is probably not enough.

Key Takeaways

  • Saving only 10% of your income—a time-honored yardstick financial planners often use—isn’t enough to retire.
  • Saving 10% of your salary per year for retirement doesn’t take into account that younger workers earn less than older ones.
  • 401(k) accounts offer considerably higher annual contribution limits than traditional IRAs.
  • 401(k) accounts can come with a matching employer contribution, which is in effect free money.

What About Social Security?

While the government assures us that Social Security benefits will be around when it’s time to retire, it’s best not to rely too heavily on others when planning how to live out some of the most vulnerable years of our lives.

Remember that the average retirement benefit for a retired worker in June 2022 was $1,659, according to the Social Security Administration. Although the payout increases with inflation each year, it's still unlikely to be a princely sum. In other words, it’s best to be ultraconservative and not rely on it as the main element of your retirement income.

The Saving and Spending Rules of Retirement

There are two broad rules some experts use to calculate how much you’ll need to save—and how much you can afford to spend—to sustain yourself in retirement.

The Rule of 20

This rule requires that for every dollar in income needed in retirement, a retiree should save $20. Let’s say you earn about $48,000 in a year. You would need $960,000 by the time you stop working to maintain the same income level afterward. If you had somehow managed to save 10% of that salary or $4,800 per year ($400 per month) for 40 years at 6.5% interest, that would get you to slightly more than $913,425, which is close.

However, young people generally earn less than older ones. And how many people save $4,800 a year for 40 years? Realistically, most people need to save well over 10% of their income to come close to what they need.

The 4% Rule

The 4% rule refers to how much you should withdraw once you get to retirement. To sustain savings over the long term, it recommends that retirees withdraw 4% of their money from their retirement account in the first year of retirement, then that they use that as a baseline to withdraw an inflation-adjusted amount in each subsequent year.

“I think 3% as a withdrawal rate is a more conservative and realistic rule for withdrawals—only to be used as a rough guideline,” says Elyse D. Foster, CFP®, founder of Harbor Wealth Management, in Boulder and Denver, CO. “It does not substitute for a more accurate planning projection.”


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Mathematically, 10% Just Isn’t Enough

Basic high school math tells us that saving only 10% of your income isn’t enough to retire. Let’s take a salary of around $48,000 and the rule of 20 retirement savings amount of roughly $960,000 and look at it in a different way. By saving 10%, your money would need to grow at a rate of 6.7% a year for you to retire 40 years from when you start. In order to retire early, after 30 years of contributing, you would need an unrealistically high rate of return of 10.3%.

The same problem applies to people in their 30s or older who don’t have 40 years left before retirement. In these situations not only do you need to contribute more than 10%, but you also need to double it (and then some) to have a $960,000 nest egg in 30 years.

“For 30-year-olds, moving from a 5% savings rate to a 10% savings rate adds nine additional years of retirement income," says Craig L. Israelsen, Ph.D., designer of the 7Twelve Portfolio in Springville, Utah. 

Israelsen adds:

Moving from 10% to 15% adds nine more years. Moving from 15% to 20% adds eight more years. In general, adding an additional 5% to your savings rate lengthens your retirement portfolio’s longevity by nearly a decade. For 40-year-olds, add another 5% savings chunk and you get about six more years of retirement income. For 50-year-olds, add another 5% savings chunk and you get about three more years of retirement income.

Free Retirement Money

The easiest way to save more retirement money is to find some for free. The most obvious way to accomplish this is by getting a job with a company that offers a 401(k) plan—and not only that, but also a matching 401(k) plan. In this situation, your company will automatically deduct a portion of your paycheck to contribute to the plan, then throw in some of its own money at no additional cost.

Say you're an employee (under the age of 50) who contributes the maximum annual amount to their 401(k)—$20,500 in 2022 and $22,500 in 2023. If their employer contributes a matching $5,000, they are putting away $25,500 in 2022 or $27,500 in 2023 instead.

“Let’s say you contribute 3% of your income and your company matches 3% with 3% of its own. This equals 6% of your income,” says Kirk Chisholm, wealth manager and principal at Innovative Advisory Group in Lexington, Mass. “Immediately, you are receiving a 100% return on your contribution. Where else can you expect to get 100% return on your money with almost no risk?”

There are limits to how much you can put away in a 401(k) each year. For 2022, your total 401(k) contributions—from yourself and your employer—cannot exceed $61,000 or 100% of your compensation, whichever is less. In 2023, that number rises to $66,000.

The beauty of a 401(k) match contribution is that it doesn’t count against your maximum annual contributions, that is, up until a combined contribution of $61,000 in 2022 and $66,000 in 2023 (the rest would have to come from your employer) per year.

Larger 401(k) contributions have a double benefit. A $5,000 increase in contributions every year for 40 years, compounded at 6%, boosts retirement savings by almost $800,000.

If You Don’t Have a 401(k)

This is where individual retirement accounts (IRAs) come in. They don't allow you to save as much—the maximum for 2022 is $6,000 ($6,500 for 2023) until you're 50, then $7,000 ($7,500 for 2023)—but they’re one vehicle that can get you started. Depending on your income and some other rules, you can choose between a Roth IRA (you deposit after-tax money and get more benefits at retirement) or a traditional IRA (you get the tax deduction now). You can have both an IRA and a 401(k), with deductions dependent on various Internal Revenue Service rules.

If You Are Self-Employed

If you are an entrepreneur or have a side business, you can save some of that money in a variety of retirement vehicles available to the self-employed. And there are other ways to invest money that can help with retirement, such as real estate. Discuss this with a financial advisor if possible.

A Little Government Assistance

It’s important (and cheering) to remember that with every 401(k)-contributed dollar (and traditional IRA dollar), the government gives you a slight break on your taxes by lowering your taxable income for that year. The tax deferral is an incentive to save as much money as you can for retirement.


The easiest way to duck the pain of saving a huge chunk of money each pay period is to automate your savings. By having your company or bank automatically deduct a certain amount each pay period, the money is gone before you even see your paycheck. It’s a lot easier to have the money locked away before you have access to it than it is to manually transfer it on payday when you’ve just seen an awesome pair of boots you’d like to buy.

What If You Want to Retire Early?

Let’s say that you can’t manage to save $19,500 every year to max out your 401(k) or save your IRA maximum, plus additional funds in, say, an investment account. What you do have to do is figure out how much money you’ll need in retirement and actively work to reach that goal. Take the rule of 20, for example: If you want a $100,000 income in retirement, you’ll have to save up $2 million. Cutting that annual 401(k) contribution to $6,000 a year and having a good employer match will get you there.

Tax-advantaged accounts such as 401(k)s and IRAs have strict and complex rules for withdrawal before a certain age and aren’t too helpful for a person looking to retire early. In addition to saving extra, you may want to keep some of it outside the system in a regular savings or (when it grows enough) brokerage account.

Even if you plan to retire at 55, you’ll need to cover your living expenses for four-and-a-half years before you can withdraw from your 401(k) at age 59½ without incurring a penalty. Having additional nonretirement savings, investments, or passive income is crucial for early retirement and is a big reason why you need to save more than 10% of your income for retirement.

Both IRAs and 401(k)s make it tough to access funds before age 59½, so you should also maintain nonretirement savings accounts that are available to you quickly.

The Bottom Line

Ten percent sounds like a nice round number to save. You get your weekly paycheck of $700, transfer $70 to savings, and then spend the rest on whatever you’d like. Your friends applaud you because your savings account is growing by thousands a year, and you feel like a superstar.

However, when it comes time to retire, you’ll find that your $70 a week contributions for the past 40 years are only worth a little over half a million dollars. Following the 4% rule, this half a million dollars will provide you with less than $23,000 a year in income before taxes. Based on these figures, it may be necessary to save more than 10% of your income for retirement.

Article Sources
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  2. Social Security Administration. "Social Security Program Fact Sheet."

  3. Charles Schwab. "Beyond the 4% Rule: How Much Can You Spend in Retirement?"

  4. Internal Revenue Service. “401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500.”

  5. Internal Revenue Service. "401(k) Plans - Deferrals and Matching When Compensation Exceeds the Annual Limit."

  6. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  7. Internal Revenue Service. "Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)."

  8. Internal Revenue Service. "401(k) Resource Guide - Plan Participants - General Distribution Rules."

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