The Ideal Contribution Rate

How much should I save? It’s a big question that many people ask themselves and a question we are asked quite often.

As Les pointed out in his January 13 blog, there are so many numbers out there, but really only five key ones. The percentage of your paycheck that goes to savings/investments is one of those five.

He also pointed out that there is no magic percentage – that everyone’s circumstances are different – but a good rule of thumb is 10-20% of your GROSS pay. Millennials who have 30 or more years to build their retirement nest eggs can get away with a smaller percentage, perhaps even high single digits like 8%. But if you’re 45 and haven’t saved much, even 20% may not be enough.

This may sound overwhelming to many. The fact is the majority of people out there are severely under-contributing to their savings. It’s easy to spend on another latte and there’s always other bills to pay. And for parents, there is also educational funding to worry about.

We’d like to help you overcome these hurdles. Here are some of the ways to do that:

  1. Start small, start early. Start today and get the power of compounding working!
  1. Save money regularly. A good idea is to match your saving schedule with your payroll schedule and set up automatic contributions to your retirement or investment accounts. See how much you could save.

Here is an example of how saving and investing small amounts, i.e. $100/week, can really make a difference. If you contribute $100/week, growing at 4%, after 40 years you will end up with $514,064. With an 8% rate of return you would have $1,530,399!

Savings 8

  1. Enroll in your employer’s company plan. If you are working, make sure that you are enrolled in your company’s retirement plan and let the power of tax-deferral (or in the case of Roth: tax-exempt) work for you!
  1. Get your “free lunch”! Most employees can get a company match of 3% or more assuming they make a big enough salary deferral. Make sure to max out your company match – you can’t get a better risk-adjusted rate of return anywhere.
  1. Sign up for auto-escalation! If your employer’s plan has it, enroll in the auto-escalation program. This is a program where your deferrals automatically increase each year. If you employer does not have this feature, remember to manually adjust your deferral up a little bit annually (perhaps 5-10% more than the previous year). Put a reminder on your calendar.
  1. Save all or part of any salary increases. With inflation running south of 1.5%, any salary increase over that amount can/should be directly applied to your savings. “Pay yourself first!”
  1. Save all or part of any bonuses. If you’re not confident in your long-term plan, avoid dropping 100% of that bonus on the latest wide screen TV and put it into one of your investment accounts.
  1. Save all or part of any tax refunds. Another potential area to get working for you.
  1. Reduce your spending! Americans are notorious for spending their whole paycheck on things that you might wish for or want but certainly do not need. Start tracking your budget through an online program or a simple Excel spreadsheet to identify areas of spending that can be cut and applied to savings.

Keep in mind that our government’s tax code has presented you with opportunities to save more within some fine vehicles. IRAs, 401Ks, 403Bs are some great tax-deferred or tax-exempt vehicles that should be maxed typically before contributing to non-tax-advantageous accounts. See below for some important dates and contribution limits.

Probably the most important decision one can make about retirement is to take responsibility for funding it themselves. There is much uncertainty about your future and what resources you will have. Make a more stable tomorrow by taking matters into your own hands now by saving. Don’t let time slip by. Take action today. Be realistic with what you can do, but do something before it’s too late.

IRA REMINDER: There’s still time to make your 2014 IRA contribution. Deadline is April 15. 

  • 2014 IRA Contribution Limit: $5500 + $1000 catch-up for those age 50+
  • And it’s never too early to get going on this year!
  • 2015 IRA Limit: $5500 + $1000 catch-up for those age 50+


  • 2015 Maximum 401K Contribution: $18,000 + $6,000 catch-up for those over 50.