Declare Your Financial Independence!

Common rules of thumb like the 50-30-20 rule and ye olde 4% rule (and why it should be 5%).

Age-based retirement savings benchmarks from financial-services firms.

Getting a professional second opinion from an experienced financial planner who charges by the hour or project — and where to find such a planner.

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Robert Brokamp: It's July 4th, the day America celebrates the adoption of the Declaration of Independence and the official birthday of our nation. Nothing more American than financial independence. After all, retirement is the money-related goal shared by just about everyone. We thought it fitting that in this installment of our 2026 Financial Planning Challenge, airing on America's Independence Day, that we focus on retirement. How do you know if your retirement plan is on track? And how will you know that you're financially ready to bid adieu to the working world? Here to discuss how to find the answers to those questions? Is my Foolish colleague certified financial planner Stephanie Marini. Welcome back to the show, Stephanie.

Stephanie Marini: Thanks for having me. I'm excited about this one.

Robert Brokamp: We're going to go through various ways of assessing your retirement progress from very general guidelines to more customized assessments. First, start off with the general stuff and talk about common retirement planning rules of thumb, and there are a bunch out there, and I would say most have at least some basis in good financial planning principles. Stephanie, what's a rule of thumb that you'd like to highlight?

Stephanie Marine: My favorite is always the 50/30/20 rule, so for those who don't know, 50% of income would be allocated for needs, 30% for wants, and 20% for savings. I like this one because for 80% to be going toward needs and wants feels like a really manageable percentage for most people, and also, it's a set-it-and-forget-it type of thing. If you can get within these guidelines, then checking it periodically makes it a little bit easier, and then also percentages are an easy way to tackle lifestyle creep or lifestyle inflation. As your income increases, the savings amount should be going up by a percentage relative to your income going up, so it helps combat that, too.

Robert Brokamp: When it drawbacks to this rule of thumb that you feel, maybe a little misleading for some people?

Stephanie Marini: Definitely, like a lot of these financial planning principles, it's general, so you have to apply it to your specific circumstance; 50% does seem like a lot, but for those people living in Sacramento, New York, of those high-cost-of-living areas, 50% might not be enough when rent is so high, so adjustments are needed. Also, once you factor in goals, someone who wants to retire and support extended family might need more than that 20% savings. It just depends. It's general, but there are some downsides to it.

Robert Brokamp: Every summer, I teach a class to our interns at The Motley Fool, and in the past, I've done it along with Buck Hartzell, a colleague who recently retired. I've used this rule of thumb every time, and then Buck always follows with 20% isn't enough. You should save until it hurts. There's always good to throw out there. If you could save more, that's better, and Buck just retired, so it worked for him. I'll touch on a related rule of thumb, this rule of thumb is 20% for savings, but that's savings for everything, when it comes to retirement, another rule is that 15% should be saved for retirement and that would include your match. So if you get a 5% match from your employer, you just have to put in the 10% to get the 15%. I think it's a good starting point, assumes you are starting to retire or save for retirement at some point, maybe in your 20s, maybe early 30s, so if you're getting a late start on saving for retirement, maybe has to be a little bit more than that, if you want to retire in your mid-60s. Then I feel like when it comes to rule thumbs, we have to, of course, touch on the old 4% rule. We've talked about it a lot on this show in the past. I started in 1994 with a report from Bill Bengen. He has since come out with a book saying, 4.7% is really the worst-case scenario. If he were retiring today, he would choose 5.5%. There's other reports that have found that 4% is probably too low. I'm just going to highlight one that just recently came out by David Blanchett of PGIM.

It's entitled rethinking safe initial withdrawal rates, and I thought this was interesting because he decided that you could provide guidance on safe withdrawal rates based on how much of your portfolio needs to cover essential expenses. He found that if you need to cover all your essential expenses with a portfolio for 30-year retirement, safe withdrawal rate should be 4.4%, maybe a moderate amount would be 4.9%, or if you have a lot of flexibility in your portfolio, 5.6%, so I'm just highlighting that. As again, there's a basic rule of thumb, but there's a lot of research about how to customize it. Me personally, I think 4% probably should start at 5% for most people, and then you can adjust for your circumstances. Let's move on to some guidelines that get a little bit more customized, and these are age-based guidelines provided by many firms. In fact, most firms, I would say, have some guideline along these lines.

In most cases, they provide the guideline as a multiple of household income that you should have accumulated by a certain age, if you want to be on track to retire. Each firm's guidelines is going to be a little different because they use different assumptions. I'm just going to look at a couple of examples here. Probably the most well known come from Fidelity, so at age 30, they think you should have one time your income to save, so your household income is $75,000, you should have $75,000 saved in your 401(k)s and IRAs. At age 40, that multiple should be three, at age 56 the multiple should be six, at age 60, a multiple of eight, and at retirement, it should be a multiple of 10. Now, I'm going to give another opinion from T. Rowe Price. At age 30, they think you should have 0.5% times your household income; 40, two times; 50, five times; 60, nine times in the retirement 11 times. T. Rowe Price starts out a little lower at the beginning, maybe recognizing that when you just start your career, you might have school loans or something, you can't save as much, but then it ramps up later on. But another key point here is that T. Rowe Price assumes you're going to retire at age 65 or as Fidelity assumes a retirement at age of 67, so it's really important to dig into the assumptions behind these guidelines to see which ones are more applicable to your situation. With all that said, Stephanie, what do you think of these age-based guidelines?