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Financial Planning: Determining a Retirement Savings Rate

Financial Planning: Determining a Retirement Savings Rate
By Andy Reynolds, CFP, MBA

As we meet with new families, we continually hear the same two questions: 1) are we making good decisions with the money we earn, and 2) are we saving enough for retirement?  These questions are typical whether a person is 35 years old or 55 years old.  According to the Federal Reserve Bank of St. Louis, prior to the pandemic, Americans were saving around 7% of their disposable income1.  This figure peaked substantially during COVID, hit 12.4% in May 2021, and accounts for 4.1% of disposable personal income as of April 2023.  Note, this is a savings rate relative to their disposable income.  Fortunately for many of the people we work with, when compared to the average, most of our clients are saving more than their peers.  However, that does not necessarily mean that they are saving enough to meet their own personal goals.

When we advise clients on a savings ratio, we always strongly recommend first establishing an emergency fund.  While emergency funds are not always going to provide someone with the greatest investment return and may be somewhat inefficient, they can help provide immediate liquidity should an unforeseen cash need occur.  This is a concept that Americans have not grasped, hence the explosion of credit cards and credit card debt.

After one establishes an emergency fund, we believe their priorities should turn next to a combination of paying off debt and saving for retirement.  Ideally, all debts (including a home mortgage) are paid off prior to retirement.  While also considering debt payments, we recommend to clients that they save 10% – 15% of their salary towards retirement – with a preference towards 15%.  When completing Monte Carlo simulations (what are Monte Carlo Simulations?) and taking into account Social Security, a contribution rate of 15% provides a general comfortability that one could maintain a similar lifestyle during retirement.  The 15% contribution level can be made up of BOTH employee contributions and employer contributions (assuming the employee maintains them as vested funds).  For example, if an employee contributes 10% of the salary and the employer contributes 5%, we would view this as an acceptable contribution rate.

A key component of the 15% contribution is that this is done from the first day of employment.  From a behavioral finance standpoint, it is much easier to start early than to start late.  Additionally, if one does not increase their contribution percentage until later in their working years, our Monte Carlo simulation may require contribution rates of even greater than 15%.  Generally, the later someone waits to save for retirement, the higher the required contribution rate.

According to Time Magazine2 a pre-pandemic study by Vanguard and Fidelity indicate that employees are contributing on average 6.2% of pay and 8.4% of pay into retirement accounts at these respective companies.  Factor in the employer contribution and these rates increased to 10.9% and 12.9% of total pay, respectively.  This is a positive from a retirement contribution perspective for working Americans.

We do recognize that there is a general thought process that people will spend less during retirement.  While this may be somewhat true due to mortgages being paid off, college savings no longer being needed, etc., we typically find that most people want to spend very close to their pre-retirement income.  Expenses that are eliminated such as child-rearing and mortgage are often replaced with new expenses such as grandchildren, family trips, travel, increased entertainment, etc.

When we consider retirement contribution rates with clients, we want them to consider the following general goals:

  • Increase contributions to retirement every year (even if it is just 0.5% per year or even as little as $10 per paycheck).
  • Increase contributions with raises. Perhaps when you get a raise take 50% of it and contribute that portion towards retirement.
  • Start early! 

About Ballast

Ballast is an employee-owned, financial planning and investment management firm located in Lexington, KY. Ballast provides individualized services to high-income earners, high-net-worth clients, and those individuals/businesses who have complex situations. To learn more about the intricacies of the information above or to learn about our firm, please visit or call our office at