Retirees in their early years want to live it up — spending more during those years than what people traditionally have done, while at the same time keeping money in their workplace retirement plans to continue building wealth.
Problem is, they’re taking more money out of their plans than they have put in, and many could potentially eventually outlive their savings.
Such are the findings of J.P. Morgan Asset Management’s new report, Retirement by the Numbers, which draws upon actual saving and withdrawal patterns from roughly 4,500 defined contribution plans with more than 1.4 million participants. Retiree spending data comes from more than five million de-identified households with Chase Bank debit and/or credit cards.
Keeping assets in plan
Substantially more participants are now keeping assets in their plans after retiring, according to the research. In the earliest years of the firm’s research, the vast majority of participants withdrew all of their plan assets within three years of retiring.
However, in this year’s study, there was a significant leap in the number leaving at least a portion of their balances in the plans — more than double from 10 years ago.
In 2019, 42 percent of participants left balances in their plans in the three years following retirement, up significantly from 28 percent in 2018 and double the percentage — 20 percent — in 2009 (2020 data reflecting behaviors during the pandemic were omitted because of the skewed anomaly, and will be analyzed at a later date).
“Participants are trying to continue to generate income from the wealth they’ve accumulated, so they can maintain the same lifestyle they had while they were working,” Kelly Hahn, a defined contribution strategist at the firm and one of the report’s authors, told BenefitsPRO.
Increased spending early on
However, at the same time, participants are still spending more in their early years of retirement than what is typically expected, the research found.
“Plan sponsors should help participants by getting them to think about what their goal is for their money — if it’s consumption, plan sponsors should educate participants on how to consume their money that is most cost efficient, so they won’t run out of money later,” Hahn said.
Save, save, save
One main point to educate participants while they’re still working and drawing a steady paycheck: Save more now.
Conventional wisdom used to be that participants should plan on needing to replace around 70 percent to 80 percent of their working income. However, the latest JPM research shows that the average figure is more than 90 percent, primarily due to increased household spending, though these spending levels steadily decline in real terms through retirement.
Problem is, average starting contribution rates begin at 5 percent and never reach 10 percent before retirement — the percentage JPM experts believe would help meet most retirees’ actual spending behaviors.
“We think part of the reason why average contribution rates have been so low or even go down is that many people are auto-enrolled,” Hahn said. “While that’s great, you still end up having a lot of people who don’t interact with their plans as much and they just may be stuck at the default rate. Plan sponsors can remedy that by introducing auto escalation.”
The research also shed light on the importance of considering how the distinct accumulation and decumulation phases work together, now that more participants are using their plans as investment vehicles post-retirement.
Indeed, the firm’s 2021 participant survey found that as many as 85 percent of respondents said they were at least somewhat likely to stay in their plans after retiring if there was an in-plan retirement income option.
“We’re really excited about the data itself — it’s the first time we looked at a holistic set of real behaviors — how people both save and spend in retirement,” Hahn said.
J.P. Morgan Asset Management has now introduced a more “dynamic” retirement income strategy for the plans it offers, to help set an optimized annual spend-down amount that changes each year, starting at the point of retirement, according to the report.