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Why I Don’t Like or Subscribe to the 10% Savings Rule

I read a financial blog the other day that tossed off that old standby of the 10% savings rule for retirement. For as long as I can remember I’ve heard that the best and most sure way to save for retirement is the 10% savings rule.  The 10% rule has long been the golden rule of retirement and you’ll find it in many financial blogs, articles and books. It seems like a fine idea. It’s simple. It’s a good round number and, I’m sure it has worked for some people. Just save 10% of what you make and your future is assured, we’ve been told. But I don’t like this rule. I’m not a naysayer by nature. I’m not usually one to pooh-pooh the advice of financial gurus who are far more educated about money and interest rates and general rules of thumb than I am. But what I am is a regular person. I’m pretty sure my experience is pretty average, as is the experience of many.

The 10% Rule when you are young…

I started out with very little real sense of money other than how to make some and spends some. When I was a young person and going into college, there was always the idea of “someday.” Retirement seemed a lifetime a way because it was. When you head off to college or to pursue that great job, you have a headful of ideas that the future is bright and rosy and shiny. Surely you will steadily earn more as you progress in your career. Surely you will find success after success. This is often long before marriages occur or children come. Long before mortgages must be paid and water heaters replaced. Before you believe that one day your knees will start to creak and ache on occasion or your back gets a little sore getting up in the morning (not that I’m falling apart. I’m a pretty healthy 37 year old.) When I was 20, 25, even as I left my 20’s behind me, retirement was still a lifetime away to me. If I could afford the car payment, I bought the car. If I could afford the monthly cable bill, I had HBO. I didn’t think too far down the road yet. What I had yet to experience was one good, scary kick in the teeth that often comes along as the magic of youth begins to wane and the reality of life sets in. The problem was, back then, the 10% rule was too simple and something I’d get to. Eventually.

How’s it really doing for us?

Now that I’ve got a little life under my belt I can look back and see that I would have been far better served by a less simplistic and general 10% rule. According to Bankrate.com fewer than 10% of Americans have an emergency fund to fall back on. According to the Employee Benefits Research Institute, 29% of workers 55 years of age or older had less than $10k in savings. A whopping 56% of workers polled by the Employee Benefit Research Institute in their Retirement Confidence Survey had less than $25k in savings (not including their home value or retirement benefits).  Only 42% of workers have even tried to determine their retirement needs. That means the remaining 58% haven’t tried at all.  So how well is that 10% rule working for any of us? Financial “rules” are all well and good but it seems very few have embraced or followed it. The problem with the 10% rule is that it works decently if you start young and keep it up. And never stop. But what if you didn’t? What now? And what about debt? How will that play into retirement? The 10% rule is just too generic.

It doesn’t ask you to do what you really need to do and it might just hold you back.

My husband and I have whittled away our debt and are coming to the end of a long journey of paying off our past. We have survived job changes and losses, cross country moves, buying and selling a home and are in the midst of raising our children. It took a while to get our heads on straight about the matter but we finally have. When we flipped the switch on our debt and started the long hard work of digging out we began to learn just how important it was to look closely at what we lived on, what we consumed, and why. When we thought we had the lowest number we could live on, my husband went without a job for five months (blessedly short during grim economic times, I’m aware). We figured out that what we originally felt was our lowest survival budget before his unemployment could actually be slashed by another $12,000 a year. It shocked us that we hadn’t seen it before but until we really had to we didn’t look closely enough. It’s amazing what you can do when you suddenly have to. My husband not being able to find work was frightening but I am grateful for all that we learned from that time. We learned what we need to survive and what we don’t. We learned very clearly the difference between our needs and wants. We got really adept at living on considerably less. As we are coming to the end of our Dave Ramsey debt snowball we have come to realize we have no intention of ramping up our spending and only saving 10%. Why cap saving for our future at such a low number? We’re extremely happy and we have all we need. We manage a few wants on occasion and it makes them all the more fun and special. But we don’t really need much. We plan to funnel what is left after our needs are met monthly into our savings, retirement and children’s education funds. We don’t want our children to come out of college in debt because we’d rather have things now that don’t matter all that much in the grand scheme of our lives.. We don’t want to run the risk of our children having to care for us because we did not do our very best to prepare. When we’ve got good solid numbers in our retirement account and a healthy amount socked away for the kids’ education and are feeling confident about building ourselves a good solid nest egg we’ll consider the iPhones we’ve long wanted and cable again (I’d love to watch Project Runway or Deadliest Catch-if they are still on the air by then). We’ll eat dinner out a little more often and go on more vacations. But until then we’re holding off and working hard. Knowing what we need to live a good life now as well as understanding and keeping reasonable restraint on our wants is what is serving us well. We know the average person spends 20 years in retirement (and we’re hoping for better than average), we’ve developed a pretty good roadmap for our future needs. We review it and discuss it regularly.

You can make a better roadmap for your future.

For me, I’ve found that the 10% rule is just too generic.  It’s too flat and not dynamic like the reality of life. It doesn’t call us to a higher standard or to a better, clearer road ahead. It gives a false sense of security.  It doesn’t ask you to know what’s in your financial roadside toolkit or to even look there before heading out on your journey. Know what you have. Know what you need. Know where you want to go. These are far more helpful in determining your real needs for the future than a flat 10% rule. You can do better by getting your budget in order and knowing your finances. Make it a goal to understand your needs vs. your wants more clearly. It is a process. It takes time. There is work involved, but if you get attentive to the matter, it’s really not that hard. It just takes making the decision and having a little dedication. Believe you can do it and make your road map to get to a better future and you’re far more likely to get there. Don’t fall for the false prophet of the 10% rule. I’m glad I haven’t.

Join me in the Comments:  

How do you feel about your financial future and retirement? Do you feel the 10% rule works for you? Do you have a roadmap? I’d love to hear what works for you or doesn’t work for you in the Comments. Let’s inspire others!