Saving for Retirement – Does the 50-30-20 Rule Really Work?

50-30-20 rule

How Much of My Paycheck Should I Save?

The question, “How much of my paycheck should I save each month?”  is probably on your mind when you think about saving for retirement.

It’s a complex question that depends on many variables.  And like many complex questions, it’s natural to look for rules of thumb to help with your decision-making.

A popular guideline is the 50-30-20 Rule, first introduced by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan

This rule states that when you get your paycheck, 50% of your money should go toward necessities, 30% of your money should go toward discretionary spending or “nice to haves” and 20% of your money should fund retirement.

Wow – 20%! That’s a big number to carve out of every paycheck for savings, right?  I’m now 46 years old and I can tell you that I have definitely NOT been following the 50-30-20 Rule when it comes to my retirement savings plan.

And it appears that not many other people are following the 50-30-20 Rule either.  According to this recent article, about half of all American households have no retirement savings whatsoever.

Looking at it in terms of average personal net worth does not paint a much prettier picture.  According to the Census Bureau, the average personal net worth (excluding home equity) for Americans aged 35-44 is $14,226 and is $45,447 for those between the ages of 55-64.  These figures do not seem consistent with people consistently saving even 5% of their incomes.

My personal savings have looked more like the 50-40-10 rule with about 10% of my savings going to retirement since I started working in my early 20’s.  And it shouldn’t surprise you that as a financial advisor, I’ve done the math and feel very good about my long-term finances and ability to retire comfortably maintaining at least the lifestyle that my family enjoys today.

So after looking at the national averages and my own personal finances, I’m left wondering if the 50-30-20 Rule is overkill or is it something I should be recommending to my clients.  And as usual, when I’m faced with this kind of question, I break out the spreadsheets and start cranking through some numbers!

Let’s Do Some Math!

To assess the validity of the 50-30-20 Rule, I put together five spreadsheets.  Each spreadsheet assumes that you begin saving for retirement at a different age.  The five ages I chose were starting to save at 22 (my own personal experience), 25, 30, 35 and 40.

I also plugged in the following additional assumptions that may or may not be valid for your unique circumstances:

  • You started your career in 1992 earning an average salary of $41,000 before taxes. (This was my starting salary as a newly minted Chemical Engineer, fresh out of college.)
  • Inflation averages 4% per year.
  • You pay a total tax rate (federal, state and local) of 33% of your income throughout your career.
  • You want to start your retirement in the year 2040 with the same standard of living you had in 1992. This requires an after tax income of $180,492 to account for inflation.
  • You work full time until age 70.
  • Your average investment returns are 8% per year net of all fees and expenses.
  • You begin collecting Social Security at age 70 in the year 2040 with a starting annual benefit of $58,810 per year.
  • Your Social Security Benefit increases by 2% a year and you also increase your required retirement income by 2% each year between the ages of 70-100.
  • You live to be age 100.

Drumroll Please!

So what percentage of income did each of these five people need to save to maintain this standard of living in retirement all the way through age 100?  Not surprisingly, the earlier you start, the less you have to save:

START OF RETIREMENT SAVING AGE REQUIRED % OF INCOME
Age 22 11%
Age 25 13%
Age 30 16%
Age 35 20%
Age 40 26%

Your Results May Vary….

I can’t stress enough that the table above is simply meant as a GENERAL GUIDELINE and may or may not apply to your unique circumstances.  The assumptions I’ve made are relatively conservative and lots of things could go your way to make the math better.

For example, you may be able to get by with a lower rate of savings if one or more of the following is true:

  • Market returns are higher or inflation is lower
  • You decide to semi-retire at age 70 and continue working part time beyond that
  • You’re in a lower tax bracket or live in a state with lower taxes.
  • You’re willing to accept a reduced standard of living at a later stage of retirement (say ages 85-100)
  • You live to something less than 100 (hard to root for this one, but it does help the math!)

Your Assignment

No matter what your unique circumstances are, here are three main points you can take away and build into your long term financial plan:

  1. Start saving for retirement as early as possible.
  2. Plan on saving a MINIMUM of 10% of your income – more if you can.
  3. Put a long-term plan in place to save 20% of your income, particularly if you did not meaningfully start to save for retirement before the age of 35.

That’s my take on the 50-30-20 Rule.  What’s yours?  I’d be happy to hear your point of view in the comments below.

This article was originally published on NerdWallet.com

6 Comments

  1. Dave Rowan (Opa) on April 14, 2016 at 1:08 pm

    Thank you for the excellent analysis Re Saving for Retirement. However, doing an analysis of this nature for the general public is like taking a single page from a large book. Your starting reference point is age 22 and at a standard of living figure of $41,000 which you then convert to a same standard of living at retirement age. What if my standard of living is based on $35,000 per year or is at $65,000 per year? Do the same percentages apply?

    A second question, if we have multiple income sources in our retirement portfolio which I would assume all people do, do the change factors (like inflation) apply equally?

    How do we build in “loss or change to one of our income souces (like Social Security) during our retirement years. Isn’t preparing for retirement actually getting more complicated as our rapidly changing world is doing now?

    Thank you for entertaining my thoughts.



    • Dave Rowan on April 16, 2016 at 5:26 pm

      Thanks for the excellent questions! Answering your first question – You are correct that the example provided is for a single retirement scenario. We are using this example to illustrate the overall concept that the earlier you get started saving for retirement, the lower the savings percentage you must commit to.

      For question #2, I have found that it’s OK to use a blanket assumption for inflation, even if you have multiple income sources. A long-term cash flow plan is meant to be a general guide for spending and saving decisions both pre- and post-retirement.

      For question #3 – yes! The concept of retirement is dramatically changing, particularly given that people are living longer and need to provide for a much longer period of time. Many people between the ages of 55-75 are choosing to “un-retire” and pursue an encore career that is more appealing than their first career, but still provides much needed income to beef up their retirement savings. This study from Merrill Lynch provides an excellent overview of the changing retirement landscape – http://www.ml.com/publish/content/application/pdf/GWMOL/MLWM_Work-in-Retirement_2014.pdf

      Hope these answers help – keep the great questions coming!



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