Why the 10% solution is actually 90% wrong

(Money Magazine) -- It's a rule of thumb that's been repeated so often it's become accepted wisdom: If you want to be financially set in retirement, you should save 10 percent of your salary each year.

The 10 percent solution has simplicity going for it. And the fact that it's invoked so frequently lends it a certain air of authority. But will following this strategy guarantee you a secure retirement?

I wouldn't count on it. Sure, like most rules of thumb, this one can work in some circumstances: If you start stashing away 10 percent of your income in retirement accounts at the beginning of your career and do so without fail year after year, you could very well end up with enough money to support a comfortable retirement.

But note the italics. In real life, as opposed to formulas, things don't always go so smoothly. Will you really get that early-bird start and stick to it religiously for upwards of 40 years? Even if you possess an iron will, there might be times when a broken-down car, orthodontia for the kids or a layoff can temporarily derail your savings plan.

So how much should you save, then? Well, you could use an online tool such as the Retirement Planner. By filling in data about your finances, you'll get a sophisticated analysis of how much you need to save to retire comfortably.

It's definitely worthwhile to do that, but remember that the result is still an estimate - a nuanced and complex estimate, to be sure, but an estimate nonetheless. It also takes a fair amount of time, which may discourage some. If you're like most people, you probably wouldn't mind a simpler answer that quickly lets you know if you're on track.

A recent study in the Journal of Financial Planning gives you just that. It tells you the percentage of income you must save each year given your current age, your income and how much you've already stashed away. The researchers calculate that savings rate on the assumption you'll retire with 80 percent of your pre-retirement income after deducting the money you save each year. After all, you're not actually living on the dollars you save, so you probably don't need to replace them after you've stopped working.

The main lesson in this study isn't exactly earth-shattering: The sooner you start, the less you must sock away each year. But when you look at the calculator and see just how huge the required savings rates can get for late starters, that lesson resonates a lot more.

Say you're 50, and you make $80,000 a year but have yet to save a dime. To retire comfortably, you'd have to begin setting aside 30 percent a year. Ouch! On the other hand, if you've been saving throughout your career and have, say, $300,000 in savings by age 50, the target rate drops to a more doable 15 percent.

But, as I mentioned before, these figures are only estimates. You may be able to retire quite comfortably while saving less if you're among the 20 percent of workers whose company provides a traditional check-a-month pension, you envision working part-time in retirement or you expect to tap the equity in your home through a reverse mortgage.

Or you may plan to live it up in retirement (or just want to be doubly sure you'll have more than enough to live on), in which case you may want to exceed these targets. Either way, know that the 10 percent rule just isn't enough.