I’m often asked, “How much should I save for retirement?” My standard answer, based on certain assumptions, is that you should save 15% of your take-home pay for retirement over your working career. As your situation varies, you must adjust your safe savings rate.

A safe savings rate gives you the best chance of having sufficient assets to retire at your target age. Being able to retire does not mean you must retire; it means you have gained financial independence. You no longer have to work for money. Now you can just work for the love of what you do.

I liken retirement projections to the Lewis and Clark expedition heading west to reach the Pacific Ocean. In the beginning, just heading the right direction is enough. But as you encounter challenging terrain, a guide who understands the lay of the land is indispensable. He or she can help you calculate where to cross the Mississippi and which pass is safest to tackle the Rockies. Most importantly, a guide can help you stay on schedule to reach your destination before the winter of retirement sets in and leaves you stranded.

More than half a million pioneers made the trip west in the mid-1800s. They left Independence, Missouri, in early spring traveling about 15 miles a day by covered wagon. It took four to six months to cover the 2,170 miles.

So too have millions of people made the financial trip to reach their goal of financial freedom on 15% of their take-home pay. But if certain assumptions are wrong for your specific situation, you may need to save more or less.

Retirement projections depend on these five factors:

1. Your age and your spouse’s age. We generally use the age of the younger spouse, assuming he or she will be the survivor and need longtime assets. This is your start date. If you have already begun saving for retirement, it is the current date.

2. Your target age for retirement. Sometimes the age at which you need to reach financial independence is along a continuum, either because a couple retires at different ages or they phase out their paid employment gradually. At the latest, this is the date when winter will set in and make progress impossible. You need to have made it safely through the Rockies and into the Willamette Valley or risk disaster.

3. Your asset allocation. A narrow asset allocation range provides the best chance of meeting your goals. Too much in bonds dampens your returns. Commission-based investment products laden with high fees/expenses and poor returns make it difficult to get the appreciation you need to grow your retirement assets. This is your method of travel. Covered wagons are the preferred way, but some are better constructed than others. Traveling on foot is equivalent to saving but not investing. Progress will be slow and very painful.

4. How much you have already saved toward retirement. At age 65 you need nearly 23 times your standard of living to survive financially for the next 35 years. At each age you must save a target multiple of your standard of living to be on track for retirement. Falling behind can be corrected but only if caught early enough.

Settlers on the Oregon Trail knew they were making progress as they passed Chimney Rock and Scotts Bluff. Before the final push they had to reach Fort Laramie and Fort Bridger in the Wyoming Territory. With winter storms looming, this was the most critical portion of the journey.

5. How much you are saving each year. If you know the first four variables, you can calculate the fifth one. According to our standard formula, you should save at least 15% of your take-home pay. But this answer is based on assumptions about the other four factors. Typically the goal was at least 15 miles each day. But much depends on how much progress you have already made. Stopping short or failing to make progress risks all your hard work. There is no penalty for arriving early.

Different assumptions for the first four variables require different savings recommendations. Here is the basis for the 15% recommendation.

First, we assume you will begin paid work at age 25 and continue until you are 65, a fairly short working career of just 40 years. If you retire at age 65 and live until 100, you are trying to save 15% of your lifestyle each year for 40 years and then spend 100% for the next 30 years. Believe it or not, this math works.

Starting at age 25, the money you save and invest that year must grow enough to support your entire spending needs at age 65. The money you save at age 26 will grow to support your spending at age 66. Adjusting for inflation, 15 grows to 100 over 40 years by earning 4.86% over inflation. At that rate of return, the value doubles every 15 years. And when you retire, you will have enough for another year.

Appreciating 4.86% over inflation is a decent return. With an average inflation rate of 4.5% it is equivalent to a nominal return of 9.36%. On average, bonds earn 3% over inflation and stocks earn 6.5% over inflation. If inflation averages 4.5%, these are equivalent to nominal returns of 7.5% and 11%, respectively.

People have been wondering recently if these returns are even possible. In contrast, during the last half of the 1990s, people thought these assumptions were pitiful. Regardless of recent history, these assumptions work well over 40-year time horizons. Some of the trip is trudging uphill; other parts are easier going. On average it all evens out.

We also assume you have a well-balanced asset allocation for your age and rebalance regularly. Few people rebalance their portfolios, at least partly because they don’t have an asset allocation. There is a rebalancing bonus, but you won’t benefit unless you have an appropriate asset allocation. Sometimes the path turns right. Later you need to turn left to balance it out and travel in roughly a straight line. By the end of the journey, all the wheels should have traveled the same distance.

And finally, we assume that if you are older than 25, you have been saving at a rate so you are on track to meet your retirement goals. If a third of your travel time is over but you haven’t even started yet, you obviously must save at a much faster pace to catch up.

Photo by Megan Marotta

Read the rest of the series:

How Much Should I Save Toward Retirement If I’m Starting Late?

How Much Should I Have Saved Toward Retirement?