The 10/30/60 Rule: Why Investment Growth Can Still Matter in Retirement

When planning for retirement, many Australians focus on how much they contribute to superannuation during their working years. Contributions are important, but they are only one part of the retirement savings story.

Over time, investment returns can also play a significant role in determining how much money is available to support retirement. Importantly, those returns do not necessarily stop when you retire.

One way to illustrate this is through a concept sometimes described as the 10/30/60 rule. This historical rule of thumb suggests that, under certain assumptions, around 10% of retirement income may come from contributions, around 30% from investment growth before retirement, and around 60% from investment growth during retirement.

These percentages are illustrative, not a formula or prediction, and were developed using particular modelling assumptions. They should not be taken as representative of what an individual Australian will experience. Actual outcomes can vary considerably depending on contribution levels, investment returns, fees, taxes, retirement age, withdrawals and lifespan. However, the concept highlights an important point: money can remain invested and potentially continue generating returns for many years after employment ends.

The first 10%: Contributions

The first part of the 10/30/60 concept represents the money contributed to retirement savings during your working life.

For Australians, this may include compulsory employer superannuation contributions, personal contributions and salary sacrifice contributions. These amounts can form the foundation on which future investment returns may build.

For example, money contributed in your 20s or 30s may remain invested for several decades before retirement. During that time, it has the potential to earn investment returns and benefit from compounding.

The 10% figure does not mean contributions are unimportant. Without money being invested in the first place, there is nothing on which future investment returns can be earned. Instead, the concept illustrates how investment growth over a long period can potentially become substantial compared with the original amounts contributed.

The next 30%: Growth before retirement

The second part represents investment growth during your working years.

Consider a simple example. If $10,000 is invested and earns a positive return, its value increases. If those earnings remain invested, subsequent positive returns may be earned on both the original $10,000 and previous earnings. This illustrates the effect of compounding.

Over several decades, compounding can have a significant effect. However, investment returns are not guaranteed. Markets rise and fall, and investments can lose value, sometimes substantially.

The amount of growth achieved before retirement will also depend on how super savings are invested. Different investment options generally involve different levels of risk and return characteristics.

Growth assets such as shares, for example, can experience larger short-term fluctuations than some defensive assets, while defensive assets have their own risks, including inflation and potentially lower returns over some periods.

There is no single investment approach suitable for everyone. Factors such as financial circumstances, objectives, investment timeframe and tolerance for risk all need to be considered.

The final 60%: Growth during retirement

The final part of the concept is perhaps the most surprising. Under the assumptions behind the rule of thumb, a substantial proportion of investment earnings may occur after retirement begins.

Retirement is sometimes viewed as the point where investing stops and spending begins. In practice, retirement can last for decades.

Someone retiring in their early or mid-60s could potentially spend 20, 30 or more years in retirement. Depending on how their savings are structured, part of their money may remain invested throughout that period while they progressively draw an income.

Retirement can therefore still involve a long investment timeframe.

However, investing in retirement brings different challenges. A retiree may be regularly withdrawing money for living expenses and may have less ability to replace investment losses through employment income.

The objective is therefore not simply to maximise returns. Retirement planning generally involves balancing the need for income and access to money with investment risk, inflation and the possibility that savings may need to last for several decades.

Your retirement balance is not necessarily a fixed pool

It can be tempting to think of your super balance on retirement day as a fixed amount that will gradually decline as you spend it. The reality can be more dynamic.

Depending on how retirement savings are invested, the remaining balance may continue to generate investment income or capital growth. At the same time, markets can fall, fees and taxes can reduce returns, and withdrawals will reduce the amount left invested.

As a result, two people who retire with identical super balances could have very different experiences depending on their investment returns, spending patterns and how long their retirement lasts.

This is why accumulating enough money by retirement is only one part of retirement planning. How savings are managed after retirement can also influence the income they provide and how long they last.

Retirement can still involve a long investment timeframe

Someone retiring at 65 and living into their 90s may spend close to three decades in retirement.

This creates a balancing act. Retirees generally need readily available money for current expenses while also needing savings to support spending many years into the future.

Holding a high proportion of savings in lower-risk assets may reduce exposure to some short-term market movements, but it does not eliminate risk. Inflation, for example, can gradually reduce purchasing power.

On the other hand, maintaining exposure to growth investments means accepting that markets will sometimes decline and investment values can fluctuate substantially.

Retirement investing therefore involves balancing a range of risks and objectives. The appropriate balance depends on individual circumstances rather than age alone.

Time can be an important part of investment outcomes

The broader lesson behind the 10/30/60 concept is the relationship between investing and time.

Money contributed earlier in life potentially has longer to generate investment returns before retirement. Similarly, money that remains invested during retirement may continue generating returns for many years.

But time is only one factor. Investment returns vary, fees and taxes can reduce balances, withdrawals leave less money invested, and inflation affects what those savings can ultimately buy.

Retirement planning is therefore better viewed as a long-term process rather than a single decision made when employment ends.

Understanding the different potential sources of retirement income including superannuation, investment earnings, government benefits and other assets can help people develop a clearer picture of their financial position and the decisions they may need to consider throughout retirement.

A note about the 10/30/60 figures

The 10/30/60 rule is a historical rule of thumb based on particular assumptions, not a universal formula or prediction. The percentages will not apply to every person, and modelling using Australian superannuation settings and different assumptions can produce different results.

Actual outcomes depend on factors including contribution history, investment performance, asset allocation, fees, taxes, inflation, withdrawal rates, retirement age and lifespan.

Superannuation, taxation and Age Pension rules can also change, so current information should be checked when making retirement decisions.

The information provided in this article is general in nature and has been prepared without considering your personal objectives, financial situation or needs. It does not constitute personal financial advice. Before making financial decisions, consider whether the information is appropriate for your circumstances and seek professional financial advice where appropriate. Where you are considering a financial product, you should read the relevant Product Disclosure Statement (PDS) and consider whether the product is appropriate for you.