Forty-two percent of 401k plan participants are leaving balances in their defined contribution account in the three years following retirement, up significantly from 28% in 2018 and more than double the percentage in 2009 (20%).
This according to new defined contribution research released Oct. 21 from J.P. Morgan Asset Management. The first Retirement by the Numbers report combines the firm’s popular Ready! Fire! Aim? research with insights into household spending patterns to provide a uniquely comprehensive view of how individuals are using their DC plans as a savings vehicle and how they are also spending as they move through retirement.
Beyond an increase in participants leaving balances in plans post-retirement, another key finding from the research is that retirees are spending at higher-than-expected levels in the early years of retirement. Also, retirees should plan on needing to replace more than 90% of their working income at retirement, a significant increase from the widely accepted 70-80% standard. This number gradually decreases once in retirement to 70% at age 85.
Findings from the report also indicate that most people are still not contributing enough to reach safe funding levels, with average starting contribution rates beginning at 5% and never reaching 10% before retirement.
“We can see from the first Retirement by the Numbers report that retirees need much more in savings to accommodate higher than expected spending needs in retirement,” said Katherine Roy, Chief Retirement Strategist, J.P. Morgan Asset Management. “In light of these findings, it’s critical that plan sponsors consider incorporating features such as automatic contribution and escalation to increase lagging contribution rates. As more participants keep assets in plans post-retirement, tools to help participants spend down in retirement will prove increasingly valuable to achieving strong retirement outcomes.”
Adjusting SmartRetirement glide path
Based on an understanding of the saving and spending patterns of plan participants, J.P. Morgan Asset Management plans to evolve the glide path across its SmartRetirement suite of target date funds, increasing equity allocations while maintaining broad diversification and de-risking in the critical years leading up to retirement.
“We have introduced a dynamic retirement income strategy into the glide path to help set an optimized annual spend down amount that changes each year, starting at the point of retirement”
Dan Oldroyd, J.P. Morgan Asset Management
“In light of our insights into the spending and savings patterns of plan participants, we have adjusted the SmartRetirement glide path to meet a higher accumulation target and enable more participants to reach a minimum level of adequate replacement income,” said Dan Oldroyd, Head of Target Date Strategies, J.P. Morgan Asset Management. “Additionally, with data telling us that more participants are staying in their plan after retiring, we have introduced a dynamic retirement income strategy into the glide path to help set an optimized annual spend down amount that changes each year, starting at the point of retirement.”
The Retirement by the Numbers research draws upon actual saving and withdrawal patterns from approximately 4,500 DC plans with more than 1.4 million participants. Retiree spending data comes from more than five million de-identified JPMorgan Chase Bank, N.A. (Chase) households.
“We remain committed to diving deeper into the numbers surrounding retirement funding and spending behavior to both help support our clients in their retirement decision making and to inform the design of our retirement solutions,” said Kelly Hahn, Defined Contribution Strategist, J.P. Morgan Asset Management.
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