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Retirement experts and financial planners often tout the 10% rule: In order to have a good retirement, you must save 10% of your income. The truth is, unless an individual plans to go abroad after retiring (see Retirement Funds Too Little? Retire Abroad), he or she will need a substantial nest egg after 65 and 10% is probably not enough.

While the government assures us that Social Security 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 (the group that receives the most) in March 2017 was $1,365, roughly $16,380 per year. Even though there are various plans that could ensure the longevity of Social Security, it’s best to be ultra-conservative 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 requires that for every dollar in income needed in retirement, a retiree should save $20. Take for example an American worker earning an average wage of $48,098.63 — the average wage in 2015 — would need $961,972.60 by the time he stops working to maintain the same income level afterward. If he had somehow managed to save $400 per month (10% of that wage) for 40 years at 6.5% interest – that would get him to slightly more than $913,425, which is close. But young people generally earn less than older ones. And how many people save $4,800 a year for 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  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 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 Financial Group, in Boulder, Colo. “It does not substitute for a more accurate planning projection.”

Mathematically, 10% Just Isn’t Enough

Basic high school math tells us that saving only 10% of a person’s income isn’t enough to retire.

Again, let’s take our average American’s salary of around $48,000 and the Rule of 20 retirement savings amount of roughly $960,000 and look at it a different way. By saving 10%, the employee’s money would need to grow at a rate of 6.7% a year for him to retire 40 years from when he starts. In order to retire early, after 30 years of contributing, he would need an unrealistically high rate of return of 10.3%.

The same problem applies to people in their 30s or above who don’t have 40 years left before retirement. In these situations, not only does an individual need to contribute more than 10%, he needs 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.  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,” says Craig L. Israelsen, Ph.D., designer of the 7Twelve Portfolio in Springville, Utah. “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 401(k) match. In this situation, the employer 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.

“Let’s say you contribute 3% of your income and your company matches the 3% with 3% of its own. This equals 6% of your income,” says Kirk Chisholm, wealth manager 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?”

The beauty of 401(k) match contribution is that it doesn’t count against a person’s maximum annual contributions – up until a combined contribution of $54,000 (the rest would have to come from your employer) per year. While a regular employee can contribute $18,000 in 2017, a person whose employer contributes $5,000 will get to put away $23,000 instead.

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. Add in the annual contribution of $18,000 and the tax savings from contributing to a retirement account, and soon retirement savings are over $4 million. (For more, see 10 Steps to Retire a Millionaire.)

If You Don't Have a 401(k)

That's where IRAs come in. They don't allow you to save as much – the maximum for 2017 is $5,500 until you're 50, then $6,500. 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). Roth vs. Traditional IRA: Which is Right for You? explains the differences. You can, by the way, have both an IRA and a 401(k), with deductions dependent on various IRS rules. 

And if you are an entreprenuer or have a side business, you can save some of that money in a variety of retirement vehicles available to the self-employed. Retirement Plans for the Self-Employed will help you get started. 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 Help

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. (For more, see Not All Retirement Savings Accounts Should Be Tax-Deferred.)

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 $18,000 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 working 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 401(k) contribution discussed earlier to $6,000 a year and having a good employer match will get you there.

Tax-advantaged accounts like 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 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. (For exceptions, see When a 401(k) Hardship Withdrawal Makes Sense.) Having additional non-retirement savings, investments or passive income is crucial for an early retirement and is a big reason why you need to save more than 10% of your income for retirement.

The Bottom Line

Ten percent sounds like a nice round number to save; you get your weekly paycheck of $700 and 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.

Don’t become a retiree who eats cat food: Save more than 10% of your income for retirement.

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