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2 Reasons Why the 50-30-20 Rule FAILS | 3 FREE Tools to Improve Retirement Planning

I am only going to say one good thing about the 50-30-20 budget and I am going to get it out of the way right now.

This budget is a good starting point… but that’s it.

If you need help with your initial budget allocations, great, start out with that 50-30-20 and see how your numbers shake out.

What I am trying to say, is that the 50-30-20 budget will, inevitably, end up being perfect for some fraction of the population. But YOU are not some fraction of the population. You have specific goals and your budget should be your path to achieve those goals.

On top of that, your goals should change over time so naturally, your budget should change too. If you keep an arbitrary allocation set in stone then you will hamstring your growth potential.

In this newsletter, I am going to show you how to derive your optimal budget allocation based on your specific goals. As always, I will show you a few examples with actual numbers at the end of the video.

On the go? Watch this video instead:

Let’s get into it!

What is the 50-30-20 Budget?

The 50-30-20 budget lays out three broad categories that your expenses fall into and the percentage of spending in each.

The 50 refers to 50% of your after-tax income going towards needs. Needs include reasonable shelter, food, transportation, and utilities. I would also throw in any expenses that are required for you to maintain your income.

The 30 refers to 30% of your after-tax income going towards wants. Wants include hobbies, entertainment, vacations, toys, donations, etc. Anything that you do not need for survival or to maintain your income.

Finally, the 20 refers to 20% of your after-tax income going toward savings. Savings include paying off debts, building up an emergency fund, and saving for retirement.

I do not have any major issues with the lens of needs, wants, and savings but there are some common pitfalls here.

What Are the Pitfalls?

Needs vs Wants

There is a slippery slope from needs to wants to be aware of.

Shelter is a need but there is a line where shelter becomes partially or even mostly a want. You do not need to live in the most luxurious downtown apartment.

Transportation is a need but you do not need a Bugatti.

Food is a need but you do not need to eat out at a fine restaurant every night.

You may need to put some percentage of your car or shelter in the want category.

Seeing that difference stacked up against other costs in your want category really helps to keep things in perspective.

Maybe that amount will be roughly equal to something that brings you infinitely more joy.

Maybe the cheaper car would allow you to afford an extra cup of coffee or avocado toast every day.

Or maybe you love the car!

Either way, you can make an informed decision.


In the savings category, I think there are too many things lumped together.

For instance, super high-interest debts like credit card debt should be prioritized above retirement savings. The average credit card interest rate is around 20% per year in 2023 while the average market return is around 10% per year. Trust me, there is not an investment out there that can deliver guaranteed 20%+ returns.

This brings me to my main issue with this budget and any other one-size-fits-all budget allocation out there.

What Are the Best Practices?

Savings First

The “best practice” when it comes to budgeting is to first, have an honest talk with your partner or yourself about your long-term goals. What do you want to save for and how fast do you want it?

Is your kid turning 16 in 3 years and you need to save for a car?

Are planning to buy a house in 5 years?

Do you want to retire comfortably in 20 years?

Needs Second

The next step is to attack your budget from the other flank and determine your bare-bones spending. What do NEED to spend no matter what?

Wants Last

Then, any amount that you spend over that amount goes into your want category – which is the last category that you fill out.

Let’s get into the example.

Where Do I Start?

I am going to focus on the savings category for this because it is generally the most difficult.

For the sake of this example, let’s assume I am 45 years old and want to retire at 65 and my current savings are $50,000. The first step is to figure out how much money I will need in addition to my social security benefit per year.

According to this article by Capital One, the average salary for someone between 45 and 55 is about $64,000.

According to this article by Fidelity, you can expect to spend between 55% and 80% of your working salary to maintain a similar lifestyle in retirement so let’s go with 70%.

How Much Do I Spend Each Year In Retirement?

With this information, I can assume that I will need roughly 70% of $64,000 which is $44,800 per year ($64,000 × 0.7 = $44,800) in today’s dollars.

It is important to remember that inflation will make this number a little bigger every year. All we can do is try our best to account for that going forward. I will adjust for inflation by reducing our investment returns every year by the historic average rate of inflation.

Fortunately for me, I do not need to come up with all of this money through my savings.

Social Security benefit in retirement if I currently make $64,000 annually

My estimated monthly Social Security benefit at the age of 65 is $1,916 which comes out to about $23,000 per year ($1,916 × 52 = $32,000).

This means that my savings only need to get me about $21,800 per year ($44,800 – $23,000 = $ 21,800).

Now that we know how much I need from my savings every year, there are only two questions remaining:

How much money do I need at 65?

How much money do I need to save every year to reach that goal?

How Much Do I Need to Withdraw Each Year from My Savings to Spend in Retirement?

Answering the first question is actually quite simple thanks to all the work and research that went into establishing the 4% rule!

The 4% rule states that you can “safely” withdraw 4% of your portfolio in the first year of retirement and then increase that amount each year to keep pace with inflation.

By using historic returns, there is only a 6% chance of running out of money before 30 years with a portfolio that consists of roughly 60% stocks and 40% bonds.

In my opinion, the 4% rule is a great target to shoot for. First of all, there is a 94% chance with historic returns that you will not run out before the age of 95 if you retire at 65. Second, if you also consider life expectancy, you have a 26-27% chance to live to 95 or beyond.

So, if I go by the 4% rule, in order to have an initial annual withdrawal of $21,800 at 65, then I need to save a total of $545,000 ($21,800 ÷ 0.04 = $545,000).

Remember, this number is not adjusted for inflation. What I mean by that is $545,000 is how much you will need today to achieve that initial annual withdrawal. 30 years from now, you will need much more.

The way I plan to account for this is by reducing investment returns by roughly the same amount as inflation – which will come into play now.

How Much Do I Need to Save Every Year to Prepare for Retirement?

The next step is to determine how much I need to save every year for the next 20 years to hit my goal.

I like to use this site,, to calculate historic market returns for the S&P 500 over different time periods. If we assume dividends are reinvested and adjusted for inflation for a 20-year period, the average annualized return is 6.637%.

Historical Average Annualized Return of the S&P 500 in a 20-year Period

Next, we take that 6.637% and plug it into this investment return calculator.

Minimum Annual Contribution in the S&P 500 to Gross $545,000 After 20 Years

As you can see, with an initial investment of $50,000, you will need to invest about $8,667 per year to hit your goal of $545,000.

Now that we have actually calculated how much we need to save, we can see what the percentage ends up being.

Net Weekly Income Calculated from Gross Yearly Income of $64,000

Using this paycheck calculator, we can see that after taxes and deductions, an annual salary of $64,000 becomes $52,763.

In this case, $8,667 just happens to be 16.4% of $52,763 ($8,667 ÷ $52,763 = 0.164), not 20% as generically proposed by the 50-30-20 framework.

When Should I Start Saving?

After going through the process, you can see that the percentage could easily be much higher or much lower depending on the goals you set for yourself.

Minimum Annual Contribution in the S&P 500 to Gross $545,000 After 10 Years

For instance, if I were to start my budget 10 years later at the age of 55, then I would need to save $33,065 each year.

That would be a staggering 62.7% savings to hit my goal ($31,066 ÷ $52,763 = 0.627).

Minimum Annual Contribution in the S&P 500 to Gross $545,000 After 30 Years

Clearly, it pays to start budgeting and making financial goals early in life.

If I started 10 years earlier, at the age of 35, then I would only need to save $2,133. 

That is just a 4% savings each year to meet my goal ($2,133 ÷ $52,763 = 0.04).

The main lesson I want you to take away from this video is understanding the importance of dynamic budgeting.

In the 50-30-20 budget, there is nothing wrong with the three categories, (Needs, Wants, and Saving) if they really resonate with you. But I believe there is a better way.

If you enjoyed the newsletter and want to learn more about budgeting, check out 3-Step Budget Tracker | How I AUTOMATE My Budgeting System where I go over the easiest and most passive budgeting system. This is the system I use personally and I have included all the tools and resources so you can too.

Until next time!

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