A 6% Default Retirement Savings Rate Is Becoming the Standard—But Is It Enough?

A 6% Default Retirement Savings Rate Is Becoming the Standard—But Is It Enough?

In this issue:

• A 6% default retirement savings rate Is becoming the standard—but Is It enough?
• Bonds for the long-term: why a 60% stock/40% bond portfolio?
• Retirement calculator: why a 12% to 15% savings rate
• Top 15 employers with the highest employer match per employee
• Market overview: renewed inflation threats

A 6% Default Savings Rate Is Becoming the Standard—But Is It Enough?

According to a recent Wall Street Journal article, nearly a third of companies that offer automatic 401(k) enrollment now start employees at a savings rate of 6% of their salary or higher—roughly double the share of organizations that did so a decade ago, based on data from Vanguard Group.

This trend suggests that 6% is becoming a more common baseline for retirement savings. But is it enough?

Financial advisors generally recommend a total savings rate of 12% to 15%, and we’ll explore why shortly. Given that the average employer match is around 4.5% (according to Vanguard and Fidelity reports), the combined savings rate for many workers would amount to approximately 10.5%. That’s closer to the target savings rate, but still falls short.

Of course, individual circumstances vary depending on your employer’s match rate. If your employer offers a 6% match or higher, starting with a 6% contribution gets you very close to the recommended range. However, if you receive no employer match, you’ll need to contribute well above 6% to make up the difference.

Regardless of your situation, one thing remains clear: at a minimum, contribute enough to take full advantage of your employer match. It’s essentially free money—a raise you don’t want to leave on the table.

Bonds for the long-term: why a 60% stock/40% bond portfolio?

We offer a counterargument to the assertion made in our previous newsletter: it’s not always true that stocks outperform bonds over the long term—sometimes, this holds even over periods exceeding 100 years!

In this article, Mark Hulbert discusses a study by Professor Edward McQuarrie, which includes the following chart:

Before 1926, bonds actually slightly outperformed stocks most of the time. In fact, from 1793 to 1903—a span of over 100 years—stocks and bonds delivered remarkably similar returns!

Hulbert further argued why a 60/40 stock-bond allocation is a better all-around asset allocation for long-term investors. He demonstrated that a balanced 60/40 portfolio delivered comparable returns with less risk than the commonly recommended “glide path” strategy. This glide path approach, widely adopted by target-date funds that are often seen in a retirement 401(k) plan, allocates 90% or more of a retirement portfolio to equities during early career years and gradually shifts a portion of that equity exposure into bonds as retirement approaches.

Fair and transparent system

In our previous newsletter, we qualified the claim that stocks always outperform in the long term: this holds true only in a fair and transparent economic and financial environment. We believe the evidence prior to 1926 reflects an era when the U.S. economy and financial markets lacked fairness and transparency. Indeed, before the 20th century, corruption was widespread in the U.S., and financial markets were rife with manipulation, including insider trading and the dissemination of false information.

Consider the ‘Gilded Age’ (1870s to 1900s), when political machines like ‘Tammany Hall’ in New York City, led by figures such as ‘William “Boss” Tweed’, controlled elections, awarded public contracts through patronage, and engaged in massive embezzlement. Tweed and his associates are estimated to have stolen millions of dollars from taxpayers.

Similarly, the ‘Robber Barons’ of that era exploited insider knowledge to manipulate markets, leaving small investors at a severe disadvantage.

These examples highlight the critical importance of reforms such as the Securities Act of 1933 and the creation of the Securities and Exchange Commission (SEC) in 1934, which were designed to curb financial abuses and restore public trust. These measures marked significant milestones in creating a more equitable political and financial system in the U.S.

While we agree that businesses should not be burdened with excessive or unnecessary regulations, it’s essential to preserve and even strengthen key regulations that ensure fairness. Don’t throw the baby out with the bathwater! This is particularly crucial for investors, especially those saving for retirement.

It’s no surprise that Warren Buffett, one of the most successful investors of all time, has often remarked on how lucky he was to have been born in the U.S. during the Great Depression—a time when the country was beginning to implement dramatic improvements in its political, economic, and financial systems, fostering a more transparent and equitable environment.

Unless society regresses into a less transparent and lawless state, we stand by our assertion that stocks outperform in the long term under fair market conditions.

Bonds for safety and diversification

Of course, we agree that bonds should absolutely have a place in a retirement investment portfolio. They serve as a crucial diversifier and a near-term savings vehicle for those approaching retirement.

Additionally, we want to remind our readers that the concept of “long-term” is relative, as our lifetimes are finite. For most of us, retirement savings are meant to be spent during our lifetime, not simply accumulated as wealth to pass on to heirs. Stocks, even in today’s fair market system, can experience prolonged periods of underperformance lasting 20 years or more.

For instance, it took approximately 18 years (till 2017) for the S&P 500 (VFINX) to recover from its losses and surpass the Total Bond Index (VBMFX) in total returns following the market peak at the end of 1999. The primary culprit? The extremely elevated stock valuations during the dot-com bubble of 1999. Unfortunately, we are now at yet another such an overvalued position. 

To summarize, we agree that for an investor who is unsure about stock and bond allocation, a 60% stocks and 40% bonds allocation is likely the “best” fit. However, it can be far more beneficial if you’re willing to invest time in learning more about investment strategies.

Tools & Tips: Retirement calculator 

Our retirement calculator can be very helpful for estimating various retirement income and spending needs. Let’s explore why a retirement savings rate of 12% to 15% is likely needed to meet retirement income goals.

To calculate this, even though 401(k) savers are on their own, we can borrow a few principles from public pension systems to arrive at a reasonable savings rate.

Public pension systems are designed to help government workers meet their retirement income needs. A commonly accepted estimate is that retirees should aim for **70%** of their pre-retirement income as retirement income replacement. Social Security is intended to replace **10% to 20%** of income, leaving about **50% to 60%** to be covered by the pension plan. Therefore, public pension systems generally target providing **50% to 60%** income replacement for long-term employees (30 years or more).

Now, let’s examine how much income replacement a typical private-sector worker could achieve by saving **10%** annually (6% employee contribution and 4% employer match), given the following typical inputs:

You can click on Balances by Year to expand and then see that the pre-retirement income at age 67 is $142,581, and the total savings balance has reached $1,158,133. Assuming a typical 4% annual withdrawal rate for spending, this would provide an estimated annual income of $46,325, which is about 32% of the pre-retirement income of $142,581.

Now, if we increase our savings rate to 15% instead of 10%, the total savings balance would grow to $1,737,186, and a 4% annual withdrawal would yield approximately 49% of the pre-retirement income of $142,581. This is closer to the target range of 50% to 60%.

Of course, the above calculations are rough estimates and serve as a general guideline. However, you can adjust the numbers to get a better sense of how much savings you need to match the value of a public sector employee’s traditional pension (using the popular 4% withdrawal rule, for example). While this exercise may not be entirely precise, it helps provide a ballpark idea of how much you need to save.

The top 15 large employers with the highest employer match per employee

In our previous newsletter, we presented the billion-dollar employer match club. However, a more accurate measure would be to calculate the average match amount per employee, as this more realistically reflects how a company performs for each employee, eliminating the size bias.

The following list shows the top 15 large companies (with more than 1,000 employees) that have the highest employer match per employee:

1. UPS/IPA DEFINED CONTRIBUTION MONEY PURCHASE PENSION PLAN: $37,593
2. MCMASTER-CARR SUPPLY COMPANY PROFIT SHARING TRUST: $32,644
3. EPIC GAMES, INC. 401(K) PLAN AND TRUST: $32,428
4. UNITED AIRLINES PILOT RETIREMENT ACCOUNT PLAN: $31,806
5. STEEL DYNAMICS, INC. PROFIT SHARING AND RETIREMENT SAVINGS PLAN: $31,587
6. SOUTHWEST AIRLINES PILOTS RETIREMENT SAVINGS PLAN: $31,114
7. NUCOR CORPORATION PROFIT SHARING AND RETIREMENT SAVINGS PLAN: $30,085
8. DELTA 401(K) RETIREMENT PLAN FOR PILOTS: $29,067
9. AMERICAN AIRLINES, INC. 401(K) PLAN FOR PILOTS: $28,375
10. ALASKA AIRLINES, INC. PILOTS INVESTMENT AND SAVINGS PLAN: $27,076
11. SPIRIT AIRLINES, INC. PILOTS’ RETIREMENT SAVINGS PLAN: $26,950
12. UNIVERSITY OF WISCONSIN MEDICAL FOUNDATION PHYSICIANS RETIREMENT PLAN: $25,787
13. ORGANON U.S. SAVINGS PLAN: $24,782
14. BAIN CAPITAL, LP PROFIT SHARING PLAN: $24,705
15. SUTTER MEDICAL GROUP 401(K) PROFIT SHARING PLAN: $24,442

All of these companies contributed more than the IRS annual employee contribution limit! This group includes many airlines, physician groups, and financial companies.

Market Overview

The following table shows the major asset price returns, post the US election: 

Last week, the October CPI (Inflation) came in at 2.6%, higher than the 2.4% in September, while the core inflation rate (excluding food and energy) remained steady at 3.3% annually. On the other hand, retail sales rose above last year’s levels, indicating continued strength in consumer spending.

Federal Reserve Chairman Jay Powell stated that the Fed is in no rush to cut interest rates, which triggered a mini-stock market correction.

Meanwhile, the U.S. dollar continued to rise, and the 10-year Treasury note rate climbed to 4.41%, up from a low of 3.6% in September. Investors seem concerned that the incoming administration’s policies could reignite inflation. While potential reforms may ultimately improve the U.S. economy in the long run, they are likely to cause short-term pain, including inflation and job dislocations (e.g., possible government job cuts from the (DOGE) Department of Government Efficiency).

For retirees, the potential rise in inflation could cause significant financial strain, offering little relief, unlike young professionals whose wages or salaries may be better aligned with a growing or inflationary economy.

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