4 Retirement Rules of Thumb Explained

Rules of thumb are useful if they get you thinking about your retirement savings, but they're no substitute for a personalized plan.

Have you heard the one about how the financial mysteries of retirement can be solved with a couple easy-to-use calculations? Just save X% of your income or take X% out of your 401(k) each year and you'll be home free?

It would be great if these rules of thumb worked for every investor in every situation, but such guidelines aren't particularly nuanced. It also doesn't help that they're frequently misunderstood and applied incorrectly.

They're not all bad, of course, especially when used as a starting point. The trick is knowing their limitations and adjusting your plans accordingly.

Here, we look at some common rules of thumb and explain where they can go wrong.

Rule of thumb: "Save 10% to 15% of your income for retirement."

The detail most people miss here is that a 10% to 15% savings rate—which includes any match from your employer—makes sense only if you start saving in your mid-20s or early 30s. If you start later, you’ll likely need to save more to maintain your current standard of living in retirement.

Beyond the rule:

The table below can give you a more realistic sense of how much of your paycheck you should consider saving, depending on the age when you start. As you can see, the sooner you start, the less you generally have to set aside—thanks to the power of compounding. If you're older, the best approach is probably to save what you can and consider increasing that amount over time by pre-committing to saving any pay increases.

Starting savings rate by age
Current age  Percent of gross annual income 
25 9%–13% 
30 13%–18%
35 17%–22%
40 21%–28%
45 26%–35%
50 33%–43%+ 

Rule of thumb: "You should have 25x your planned annual spending by the time you retire."

Investors who want to know if they're saving enough for retirement sometimes start with the idea that they need 25x their current gross income—that is, their earnings before taxes and other deductions. However, this is misleading because gross income includes retirement contributions that go away in retirement. Plus, most people start receiving Social Security benefits (or a pension).

There is a "25x rule" for retirement savings—but it should actually be applied to how much you think you'll need just from your portfolio in the first year of retirement. Determining that amount can be challenging if you haven’t worked on a financial plan with a professional (which is why we recommend that people take that step).

Beyond the rule:

You can use your gross annual income to measure your savings–if you use a realistic multiplier. Keep in mind that targets listed below are aspirational. If they seem unachievable, the best remedy is to save what you can and work with professionals to develop a plan for getting where you want to go:

Retirement assets as a multiple of gross income
Current age Multiple of gross income  
30  1x
35  2x
40 3-4x
45 4-5x
50 5-7x
55 7-10x
60 9-12x
65 13-17x

Rule of thumb: "The 4% rule."

The 4% rule is frequently misunderstood to mean you should withdraw just 4% of your portfolio every year if you want it to last. Some take it to mean you should seek a 4% yield from stocks and bonds and live off that.

However, the rule actually suggests that you add up all your investments during your first year of retirement and withdraw 4% of that total. In subsequent years, you would adjust the resulting dollar amount you withdraw to account for inflation. By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement.

Beyond the rule:

The 4% rule is a good starting point for some retirees, but we think you can actually be more flexible than that. In fact, with the right allocation and planning, you may be able to withdraw more.

Rule of thumb: "You should have 100 minus your age in stocks when retired."

This one can be fine as a starting point for someone who has substantial assets and only needs to tap interest and dividends to fund their retirement.

Other investors may find they need—or want—more stocks in their portfolio. The idea here is to let your risk tolerance and risk capacity determine your allocation. Think of it this way: Risk tolerance is a state of mind that can fluctuate in response to the market. Risk capacity, on the other hand, is fixed: Your goals have an end date, and you either have time to bounce back from losses or you don't. Combining the two can help you plan your allocation.

Beyond the rule:

The chart below offers some examples of how you could approach your allocation at different points in retirement. Again, these are just possibilities. Where you end up will depend on your preferences.

Your retirement portfolio will likely shift over time

Pie charts show shifting allocations over time. Ages 60-69 show 35% fixed income, 35% large-cap equities, 15% international equities, 10% small-cap equities, 5% cash investments. Ages 70-79 show 50% fixed income, 25% large-cap equities, 10% international equities, 5% small-cap equities, 10% cash investments. Ages 80+ show 50% fixed income, 15% large-cap equities, 5% international equities, and 30% cash investments.

Source: Schwab Center for Financial Research. For illustrative purposes only.

Bottom line

Rules of thumb gain currency because so many people cite them, but they are no substitute for a financial plan that you monitor and update regularly. Think of them as a starting point—and then personalize.

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The information provided here is for general informational purposes divid and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risks, including loss of principal.

Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets.

There are risks associated with investing in dividend paying stocks, including but not limited to the risk that stocks may reduce or stop paying dividends.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Small-cap stocks are subject to greater volatility than those in other asset categories.