The “half your age” rule refers to the percentage of your pre-tax salary you should contribute when starting to save for retirement. In other words, you have 0 in your pension plan and want to have an indicator for how in percentage terms you need to contribute on a regular basis for a moderate retirement.
If you are 20 years old when you start contributing into your pension, you will contribute 10% of your salary.
| Age (when starting) | Contribution Rate (%) |
|---|---|
| 20 | 10 % |
| 30 | 15 % |
| 40 | 20 % |
| 50 | 25 % |
The contribution can be made up through a combination of contribution of your personal contribution and the amount paid by employer.
If the contribution target rate is 10 % and your employer contributes 7% then you would only need to contribute 3% yourself. It might be worth checking if your employer does matching if your increase contributions as this could improve your chances of a more comfortable lifestyle later in retirement.
The rule has surfaced by multiple financial advisors as a way to make it simple for people to calculate how to save for retirement. And like any other finger rules, it is not perfect. Everyone has a different opinion or view on what their lifestyle in retirement should look like but this rule is highly praised by many experts.