Periodically, I'm asked this question, and after much thought, I've settled on this answer: Ten percent. But I have some caveats if your goal is to retire comfortably.
First, you need to save this from the start of your career and you cannot make any withdrawals until you are retired. If you haven't saved for years or if you have made withdrawals, you should increase this amount.
Second, this assumes you are debt free when you retire. No credit card debt. No mortgage. No car loans. No student loans that you are liable for. No home equity loans. No boat payments. If you have significant debt responsibilities when you retire, your 10% savings probably isn't enough.
Third, you need to invest this well. And that mostly means low-cost equities that you hold steadfastly to until you're at least half way to retirement.
Here's the simply math for long-term investing. After inflation, equities return about 4%. That is, after inflation they double in less than 20 years, or quadruple over a career. Bonds return about 1%. That is, very little. Cash is the worst of all. If you're paying a 2% fee for some high-flying financial boondoggle, your returns are probably cut in half.
If you try to time your investments, like most market timers you will probably be buying into equities when they are high and then selling them when they are low. That is, you will wipe out most of your returns. If you make many of these errors, such as owning a money market fund when you're under 40, your 10% savings probably will not give you what you need for retirement.
I see calculators and complex investment formulas where you are expected to estimate your income and expense thirty years out. They they tell you something like you need to save 150% of your money or you will be destitute. OK, they aren't quite that bad, but the notion that you can know these things decades out when you're struggling to budget a vacation is ludicrous. So much of the future is unknowable, including whether you will even be alive.
But there are multiple things that you can do to reasonably prepare yourself for that time when you are not able to work and care for yourself as you could when you were younger.
You can stop the terrible habit of borrowing from the future to meet your wants today. You can systematically save a reasonable amount that is moved off the table, untouchable until you are much older. You can invest both rationally and with significant upside to your investments without being risky. And that is because your money will be working for decades, not years.
And always make sure that you are saving at least the minimum that your employer is matching.
So why not 9% or 12%? Because 10 is easy to remember, easy to calculate, and with the tax deferral, is something most workers can reasonably do, especially if your employer provides matching.
Finally, accept that Social Security and Medicare will be there to cover a significant portion of your critical needs. I agree that retirement on these government programs alone is not an easy life. But it can be the floor from which you build.
With Social Security, Medicare and your 401(k) all taking a portion of your salary, the combination of these payments that are based on your past earnings can safely be assumed to keep you living into your retirement at a level that you are already accustomed.
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