Saving for Retirement: Breaking Out of the One-Size-Fits-All Approach

You may have heard that investing has rules of thumb when it comes to saving money for retirement: Start at a certain age, set aside a certain amount of each paycheck and voila! When you retire, you're good to go. Those rules of thumb may work for some people, but life presents too many variables—the age at which you started saving, the income you made and when you made it—to make any strategy one-size-fits-all. Yet it's in our nature to want rules, to have structure, so we can feel that we are on the right path. A retirement saving rate that changes with your income could provide a viable framework, especially for professionals whose income climbs steeply over time.

Rules of Thumb

Say you're starting out in your career and you want to begin setting aside money for retirement. You know that you need to save enough to replace your income in retirement (called the replacement rate). How much do you save?

The short answer is: It depends. It depends on the age at which you are starting to save (the earlier the better), and it depends on the probability of success you want to achieve with your replacement rate. Let's use a table in a Dimensional Fund Advisors study that shows the saving rates a professional would need in order to achieve a 40% replacement rate. If that professional wanted 95% success at achieving that replacement rate, they would need to start setting aside 16.8% of their income at age 25. If they waited till age 30 to start saving, they'd have to put 19.5% away. And if they didn't get started until age 35, their lifetime saving rate would be a whopping 23.8%!

The High-Wage Earner

Professionals whose income climbs steeply toward the latter part of their careers have difficulties of their own using a one-size-fits-all approach. They don't get to put their money in early and allow compounding to increase their savings.

What's more, the DFA study broke down saving rates by preretirement income, using the same 40% replacement rate as the goal. It found that professionals in the $98,355–$129,945 range at the end of their careers would need a 20.5% saving rate. In contrast, someone making $21,716–$29,307 would need an 8.8% saving rate.

Obviously, people who are going to end their career with higher incomes will need a higher saving rate, but as the study pointed out, no one knows what their final income is going to be. What's more, we have different priorities at different ages. For example, when we're younger, we spend more and save less. We're getting established and putting our earnings toward that end. As we get older—and especially as our income climbs—we spend less and save more, putting aside more of our salary for retirement.

An income-based approach to retirement savings takes those priorities into account and allows flexibility for professionals whose income climbs over time. Using a saving rate that increases as income increases, DFA found the following rates for a professional seeking a 95% chance of success for a 40% replacement rate:

Income Range Saving Rate
≤ 25,000 2.8%
25,001–40,000 5.7%
40,001–50,000 8.5%
50,001–60,000 11.3%
60,001–70,000 14.2%
70,001–85,000 17.0%
85,001–100,000 19.8%
100,001–130,000 22.6%
130,001–180,000 30.6%
> 180,000 34.0%

The same study also considered probability rates of 90% and 50%, but we'll just keep it simple here to make our point: that an income-based saving rate allows for the demands of age and income variability. As shown in the table, the reduced saving rates for lower income levels would be consistent for someone starting out in life. The higher rates would peak when salary peaks, and seem to fall in naturally with a family that is in saving mode.

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It's important to go over your numbers with your financial advisor, who can help you decide whether the amount you have put aside will be sufficient for your retirement. And regardless of the scenario you choose—a saving rate that climbs and falls with your income, or a simpler rule of thumb—two takeaways from this article should be apparent: Start saving early—the earlier the better—and be consistent about saving. Those are your two most important factors for success.


Massi Di Santis and Marlena I. Lee, Income Based Saving Rates, DFA, June 2013.