When trying to figure out how much you need to retire, there are many different rules of thumb you could follow. While I've previously discussed the 4% rule and the rule of 20, which both calculate your likely income at retirement, the most common calculation on how much to save up to retirement may be the 10% rule.

The 10% rule simply states that you should save 10% of your gross income. Note that it's gross income, not your net income or paycheque. For example, If you earn $1,500 every 2 weeks and get paid $1,000 after taxes and other deductions, you should save $150 every 2 weeks, not $100.

The issue with the 10% rule is that it only really applies to someone that starts saving in their early twenties and continues until their retirement. If you are over 30, you should consider adjusting this percentage to 15% or 20%.

Using the $150 bi-weekly example above and assuming a 7% rate of return and a retirement age of 65, let's look at how your age can effect the end result of the 10% rule.

- Starting age of 25 would have $804,472 after 40 years of saving.
- Starting age of 35 would have $380,650 after 30 years of saving.
- Starting age of 45 would have $165,200 after 20 years of saving.

Obviously it's not reasonable to simply say “save 10% of your income” without taking age into account. Wondering how much more you would need to save at ages 35 and 45 to make up for the lost time and still come in at the $800,000+ that the 25 year old would have accumulated?

- Starting age of 35 would need to save $317 bi-weekly, or 21%.
- Starting age of 45 would need to save $731 bi-weekly, or 49%.

That's not to say that if you haven't started saving and you're 40 years old there is no hope for a comfortable retirement. If 10% is all you are currently able to save, then save 10%. You will still be better off than the many Canadians that save less and you'll also have the support of the CPP, OAS and any work pension you may have. Plus, once your mortgage is paid off, save the money that would have gone towards your mortgage payment and you can still retire in style!

Great piece Tom. One of the things that made me straighten up about my own financial future was reviewing people’s retirement situation when I was 25. Here they were in their 60’s or 80’s, supposedly wealthy, and I could see the fear and uncertainty they were living in. While they were certainly better off than most of their peers, I knew I didn’t want to have those same concerns.

Thanks for this Tom. So if I have work take 5% from my bi-weekly pay to go towards my pension (which they match at 5%) and then I take 5% and buy company stocks (which the company matches 3%) can I count that towards to the 10% rule or do the experts recommend that I add 10% to my savings on top of that?

Thanks

Chris, looks like Theresa and JoeTaxpayer answered it perfectly.

18% is a great place to be at. Obviously, the more you can save, the better. But you’re likely saving more than most!

Just a word of caution on the company stock options program.

If you have a significant percentage of your savings tied up in company stock, you run the risk of losing both your steady paycheque and a good chunk of your retirement fund if the company fails (ie. Nortel).

This website gives a good summary:

http://www.nodebtplan.net/2009/07/30/how-much-company-stock-should-you-hold/

Chris – I would agree Yes.

I am actually shocked on how many “young people” as in their 30’s and 40’s don’t put any amount in. Out of all the people I know, I only know like one other couple that even put any put any money into RRSP’s.

I know currently We put in 8% (4% with company matching) But when I work full time I put in a full 10%.

I just find it hard all this financial stuff. I put in money every month for the kids college funds, and then all the insurance we have including our own disability plan, life insurance, house insurance, etc etc.

So much money goes towards that “If this happens factor.”.

Its so confusing, and I just wish we could just simply focus in one area, instead of being pulled in all different directions.

I know I should put more into the kids college funds. I put in $100 per month for two, and have put in something through out since they were babies. according to experts You should be saving $200 per month per kid, and put away before they are even born.

I think with retirement I think it matters on what kind of lifestyle you want to have. I know for us, we plan to be snowbirds, and live only in canada for 4 – 6 months of the year. We plan to live in Mexico the other time, cause of the lower cost of living. We also plan to sell our house, and just stay at our cottage for the remainder of time in canada. So for our plan We can get away with actually less. We figure about $36000.00 to $45000.00 ( current price) per year. Currently other couples are living in Mexico for about $1500 $1800 per month.

So I think when Planning, you need to consider your lifestyle.

Good information Tom. I would just be careful about assuming a 7% rate of return. That’s probably not a bad benchmark over the long term, but I think it’s important for people to realize it’s not guaranteed.

In the end, I guess a lot of our retirement planning involves making educated guesses about the future, whether it’s our income level, savings, investment returns, or inflation rates.

Chris, that’s great, it looks like 18% to me. The only warning is that if you sell the company stock, it needs to stay in your retirement-targeted account, not get mixed in with general funds. There would come a point where it’s obvious that you are ahead of your goal and either be able to choose between early retirement, reducing savings, or planning on a stepped up lifestyle after you retire. All three are nice to choose from.

Tom, I honestly believe your 10% rule is at least 10-20% too low. We need to be saving 20-30% of our gross income a year in order to comfortably retire, b/c stock market returns and private equity investments are just not enough.

Or, put it another way, save 15% of your gross income on top of maxing out your retirement savings ie $16,500 for 401k.

FS, I do agree with that, especially if someone has hit their mid-30s without saving. At the same time, I recommend saving at least 10% since it’s ultimately better than not saving at all.

You bring up one of the important facts about ratios that many people fail to consider – the real answer it that it depends on your situation. 10% is great if you start at age 22 and maintain it throughout your earning years,

andthe markets do well,andyour income continues to rise,andyou contribute for 30+ years,and… you get the point.The real amount you need to put away will vary depending on the person and the desired income at retirement. I’m a big fan pf putting as much as possible away while you are young so the power of compound interest can have a greater effect. I would rather have over contributed than undercontributed. (of course, this all depends on the ability to invest in the first place – take care of your immediate needs first!).

The 10% rule was great way to save money for retirement without compromising your desired lifestyle back in the day when major banks offered GIC’s and Term Deposits with rates of 10% or more. Fast forward to 2011 when banks are only offering 3.5% or less, one has to consider other strategies to save that are not guaranteed such as investment products with fees and commissions that don’t offer any guarantees.

We really like the 10% rule. Assuming a person has 40 years to retirement, and he would like to reach there faster, he can save even more like 60% to 80%, and start investing the remaining 10%. We know that sounds crazy, but we are in our thirties and have just started our early retirement.

This is great! Thanks for posting this! I am just turning 24 years old and hyst started to save about 20.5%. My employer puts 9% and I put in 6% into the group RSP, plus I save $200 a month on my own. I am thinking about upping my own savings to make the total 25% because I only make 43K per year.

What do you think?

Good advice, but one thing that I always find with retirement advisors is the fact that they are over optimistic about returns. Please tell me where I can get a 7% return these days.

Good luck getting a response Antonio. If you want to sleep GIC’s are the only thing.

Yeah i think i should be set. I am 24 and i put 10% into my penssion and company puts another 10% so 20% goes to penssion. And samething for my wife she works for the same company so for two of us we put 40% into penssion. and plus 5% into TFSA. yeah lots of young people dont think about that stuff. but i do not wanna work till i am 67 lol

I’m very concerned. My fiance is in his early 40’s and has zero savings. In fact he has about 10k in debt. He has a good job that pays a salary of about 80k but has no savings and hasn’t really contributed to any RSP’s. His job also offers a matching program. I have a very stable job and fantastic pension plan and my savings are over 100k. I’m sick over his situation and would appreciate any advice on this dire situation.

An important fact is almost always ignored by those who repeat the widely understood, and accepted, phenomenon that, owing the compounding, the earlier you start, the less you will need to save later.

Most illustrations almost always use a set number, such as, in the case of this article, $150 bi-weekly.

The problem is that $150 10 years from now is not worth what $150 is today. This means that the examples distort the power of compounding because while it is certainly important to start earlier, saving $150 now is the same as saving, say, $250 in 10 years. This means that while it is important to save earlier to get higher returns, it is not nearly as difficult as the example in this article implies.

Using the $150 bi-weekly example above and assuming a 7% rate of return and a retirement age of 65, let’s look at how your age can effect the end result of the 10% rule.

Starting age of 25 would have $804,472 after 40 years of saving.

Starting age of 35 would have $380,650 after 30 years of saving.

Starting age of 45 would have $165,200 after 20 years of saving.

Hi Tom – I am currently 55 years old and would like to retire by the time I’m 65. I currently have approx 200K left on my mortgage. I have a minimal amount of retirement money and was wondering how I should allocate my pay cheques in order to still retire in 10 years. My take home amount is $3500/month. Thanks