What are the most optimal behaviors?
Salary is an important behavioral input because income levels often influence contribution rates, as well as set the standard of living that needs to be replaced in retirement. As salaries move lower, Social Security tends to play a proportionately larger role in providing participants’ post-retirement income, potentially reducing the overall account balance targets lower-earning participants need to accumulate for safe levels of funding. But these relationships among salary, Social Security and contribution rates are not linear, making it difficult to assess what may be the most optimal contribution rate.
With this year’s expanded data universe, we were able to evaluate saving patterns at various salary ranges. We looked at 1) higher-income earners, with annual salaries above $85,000 ($120,000 average); 2) middle-income earners, with annual salaries between $40,000 and $85,000 ($60,000 average); and 3) lower-income earners, with annual salaries below $40,000 ($30,000 average).
Across the board, higher-income earners generally exhibited the most optimal saving patterns.
For example, average contribution rates for:
- higher-income earners started at 7.5% at age 25, remained flat at age 45, then rose to 9.2% at age 65
- middle-income earners started at 5.6% at age 25, stayed relatively the same at 5.7% at age 45, then climbed to 7.1% at age 65
- lower-income earners started at 4.3%, slightly increased to 5.0% at age 45, then increased to 6.4% at age 55
Wealthier participants’ higher average contribution rates make sense given their usually greater disposable income levels and a generally stronger likelihood of familiarity with investing and the importance of saving for retirement.
Key finding: Higher-income earners tend to contribute the highest rates
EXHIBIT 3: AVERAGE CONTRIBUTION RATES BY SALARY LEVEL
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