Is Saving 10X Your Salary for Retirement Necessary -- or Just Another Myth?

There are lots of financial myths we need to stop believing, such as that all debt is bad (a mortgage with a reasonable interest rate can be a good thing!) or that single people don't need life insurance (they do if anyone, such as parents, depends on them financially).

Another common financial bit of financial advice is that we need to save 10 times our salary for retirement. I wouldn't exactly call it a myth, but I don't think it applies well to everyone. Here's a look at the issue -- along with the related maxim that we should save 10% of our income for retirement.

Image source: Getty Images.

Is saving 10x your salary enough for retirement?

Let's lay out some numbers to begin:

Source: Author calculations.

You might eyeball it and decide that it appears to be enough -- or not enough. But eyeballing isn't enough. I would suggest that if you're trying to figure out how much you need to save for retirement, don't focus on your salary too much.

How much income will you need?

Instead, focus on how much income you expect to need in retirement. One rule of thumb is that you'll need 80% of your pre-retirement income, but that's very general. If you plan to travel a lot or you have some expensive hobbies, you may well need more. Or you might need less.

So take some time to try to figure out how much income you will need, and try to be as comprehensive as possible as you think things through. Don't overlook major categories such as housing upkeep and taxes, and remember to factor in inflation, which might cut the purchasing power of your nest egg in half over 25 years. Remember, too, that you'll spend less on some things, such as commuting and a professional wardrobe, and more on other things, such as, potentially, travel and healthcare.

Putting the 4% rule to work

Once you come up with an informed estimate of how much income you'll need in retirement, you'll need to convert that into how big a nest egg you'll need. A handy tool for that is the flawed-but-still-helpful "4% rule."

The rule posits that retirees can withdraw 4% from their nest egg in their first year of retirement and then adjust subsequent annual withdrawals for inflation. (There are other retirement withdrawal strategies to consider, as well.)

The table below shows how much you'd withdraw in your first year of retirement with nest eggs of various sizes if you're using the 4% rule:

Source: Author calculations.

Another way to arrive at your needed number with the 4% rule is to take your desired income and multiply it by 25. So if you want, say, $75,000 in income, you'd multiply that by 25, getting a target nest egg of $1,875,000. Each of us is different, and while some might require a $100,000 income in retirement, others will need more or less. To reduce risk, you might aim for a bigger nest egg than it seems you need.

The withdrawals in the table above may seem too small to you, but note that you likely have a few other income sources, such as Social Security benefits and perhaps a pension. Indeed, it's smart to set up multiple income streams in retirement, such as, perhaps, Social Security, dividend income, annuity income, withdrawals from retirement accounts, and/or rental income.

Is socking away 10% of your salary enough?

Another common piece of advice is to save 10% of your salary. That sounds nice and tidy, but it's really not that helpful. After all, how old are you when you learn of this guideline and when do you put it into practice? If you're starting to save and invest in your 40s or 50s, 10% is most likely far too little.

Some recommend socking away 15% of your income, which is better, but depending on your age and your circumstances and plans, it may be too little or too much. Much also depends on how you invest your money and how fast it grows.

For long-term growth, it's hard to beat the stock market, and investing in the stock market can be as simple as investing in one or more simple, low-fee index funds -- such as:

• Vanguard S&P 500 ETF (NYSEMKT: VOO)
• Vanguard Total Stock Market ETF (NYSEMKT: VTI)
• Vanguard Total World Stock ETF (NYSEMKT: VT)

The first will invest you in 500 of America's biggest and best companies, making up about 80% of the U.S. stock market's value. The second offers pretty much the entire U.S. stock market, and the third offers the world's stock market.

So give your retirement plan some more thought and make sure you're on track to have what you need when you need it.

Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.