As close to half of retirement plan participants struggle with credit card debt, more choose to take loans on their future savings, finds a study from J.P. Morgan Asset Management.
The institution’s “Retirement by the Numbers” report uses data from 16,000 defined contribution (DC) plans and over 12 million participants from the Employee Benefit Research Institute (EBRI), and more than five million “de-identified” Chase households to link high credit card balances with lower contribution rates and smaller account balances. It also credits the debt for reducing retirement readiness by up to 40% for older participants.
J.P. Morgan connects the savings behavior to ongoing financial stress and pressures. According to the research, average participation contribution rates start at 5% before peaking at 8%. Even as participants contribute, J.P. Morgan notes the rates are still lower than its recommended 10% for retirement funding.
However, outside influences, including emergencies, short-term costs, and ongoing inflation, further curb participants from saving more for retirement.
“Financial health matters, and the financial pressures outside of retirement plans directly affect savings behavior and long-term financial security,” said Michael Conrath, Chief Retirement Strategist at J.P. Morgan Asset Management.
The report found that even small gains could lead to substantial retirement funding. Participants who increase contributions by just 1% starting at age 25 could see an $84,000 gain, on average, by retirement—enough to fund nine years of average Medicare-related expenses. A late investor, classified as one who starts saving in the last 20 years, could save an additional $22,000 while an early investor, or one who only saves in the first 20 years, could see $60,000 added to their retirement account.
Salaries also remain an essential component to retirement funding, the study adds. Not only does it shape plan contributions, but it also influences Social Security benefits.
Yet, factors like inflation continue to derail income. Findings from Indeed’s Labor Market Update found that inflation continues to outpace wage growth for lower to middle income workers.
Employer contributions are another step to achieving secure retirement funding. J.P. Morgan’s study found that 78% of plans in this year’s research offer an employer contribution or match benefit, averaging at 3.2%. One-quarter of employer respondents provide 1.4% or less while another quarter provide 4.4% or more, with little variation by plan size, notes the findings.
“This added support can offer a meaningful boost to total retirement savings but needs to be coupled with increases in participant savings as well,” J.P. Morgan researchers wrote in the report.
Such features that could help up these savings include higher default starting rates and automatic escalation programs, along with salary increases.
Additional information from J.P. Morgan’s “Retirement by the Numbers” report can be found here.