The other day I was reading an article by Walter Updegrave, Money Magazine’s senior editor, in which he states that the “10% Rule” – the notion that you need to save 10% of your salary each year in order to have enough money when you retire – isn’t a very good savings plan.
Updegrave believes that the “10% Rule” falls short because it requires that you stash away 10% of your income every single year you’re in the work force which, for most people, is an unrealistic expectation.
I tend to disagree with Updegrave’s stance on this, and I believe that the “10% Rule” is a very good rule of thumb when it comes to stashing away money for your retirement. Here’s why:
- The “10% Rule” essentially forces you to start saving as soon as you can. One of the most widely accepted ideas in retirement planning is the earlier you start saving, the better off you’re going to be, and by having to save only 10% of your income, it’s easy for young people to get started on this plan.
- People like dealing in round numbers. Don’t get me wrong, I’m not trying to say that saving for retirement isn’t sophisticated, but any time you can make things easier and simpler, I think that’s probably a good thing.
- It’s really not that hard to find ways to save 10% of your salary. For example, many of us can simply go to our work’s HR or payroll department and tell them that we would like to put some percentage of our paycheck into a 401k account; that way, they take care of getting the money into your retirement account and all you have to do is worry about managing where the money is allocated.
Obviously, there are drawbacks to this type of retirement planning. For those of us who started saving late in the game, saving 10% of your income probably isn’t going to be enough to ensure a big nest egg, so you’re going to have to up the ante a bit. Additionally, this isn’t a set it and forget it retirement plan either. It’s not like you’re going to be guaranteed financial independence if you save 10% each year; you still need to periodically check up on things and stash away extra money when necessary.
Despite these drawbacks, I think that the “10% Rule” is a great place to start when you begin to plan how you’re going to fund your retirement.