Ready! Fire! Aim? 2018

Our ongoing study of how real-life participant saving patterns interact with target date design continues to show that suboptimal participant behaviors and the consequent increase in cash flow volatility remain much more prevalent than many plan sponsors might expect. In a series of four articles, we discuss our findings and the steps plan sponsors can take to place participants on a path to a more secure retirement.

View the Ready Fire Aim overview >

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 earners started at 4.3%, slightly increased to 5.0% at age 45, then increased to 6.4% at age 65

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


Source: J.P. Morgan retirement research, 2015–17.

Examining the individual numbers behind these averages shows a wide array of contribution behaviors within each segment. Only wealthier participants at the higher end of the average contribution rate spectrum are even approaching the savings rate of at least 10% recommended by many industry experts.

Additionally, the range of behaviors notably expands—unfortunately to the downside—moving lower on the salary scale. This reinforces our related research No one is average, which highlights how retirement planning averages, on their own, may be distorting. In order to meet the needs of the broadest swath of participants possible, the strongest target date funds should be designed for the edges as well as the middle.

Key finding: Average contribution rates remain well below 10%

Salary level Lower end Median Higher end
Higher-income earners 7.1% 7.5% 9.3%
Middle-income earners 5.4% 5.7% 7.1%
Lower-income earners 4.3% 5.0% 6.4%

Note: All contribution rates are representative of contribution rates made by individuals age 25-65. The lower end represents the bottom contributions across ages, while the higher end represents the top contribution rates across ages.
Source: J.P. Morgan retirement research, 2015–17.

Middle earners are the most likely to take loans

A sizable number of participants across all three salary levels took large account loans. On average:

  • 18% of higher-income earners borrowed 18% of account balances
  • 28% of middle-income earners borrowed 20% of account balances
  • 17% of lower-income earners borrowed 22% of account balances

Middle-income earners were more than 50% likely to take a loan compared with the other two segments. This might be because lower-income earners are simply less engaged with their plans overall and higher-income earners are less prone to need to tap into retirement assets early due to generally greater financial security. Interestingly, there was no material difference in the size of the average loan across all three groups as a percentage of account assets, though lower earners, on average, borrowed slightly more at all ages.

Key finding: Middle-income earners are most likely to take a loan


Source: J.P. Morgan retirement research, 2015–17.

Other saving behavior highlights

Salary increases

The odds of receiving a raise were fairly consistent across salary levels, with participants, on average, getting pay increases approximately every two out of three years. However, both average frequency and raise percentage size across all three groups markedly fell at age 35. Further, the average raise size was notably higher for lower-income earners, particularly in their earlier career years.

Key finding: Lower-income earners tend to experience the highest raise percentage increase


Source: J.P. Morgan retirement research, 2015–17.

Key finding: Younger participants tend to receive higher percentage raises most often  


Source: J.P. Morgan retirement research, 2015–17.


Middle- and lower-income earners were more likely to take pre-retirement withdrawals, with 11.3% and 11.5%, respectively, tapping into assets once reaching age 59½, compared with 7.7% of higher-income earners. The average withdrawal size as a percentage of overall account assets for lower-income earners was 61%—substantially higher than the average 51% for middle-income earners and 49% for higher-income earners.

Lower-income earners continued to make larger post-retirement withdrawals relative to the other two segments. Still, most participants, regardless of salary level, exited the plan within three years of retirement, with an average withdrawal of 49% to 62% per year and around 42% of participants withdrawing 100% of assets. More insights into these withdrawal patterns can be found in the third section of this year’s research, Withdrawal trends.

Implications for plan sponsors

These findings indicate a real need to pay even greater attention to educational efforts targeting employees at middle and lower salary levels, who tend to save less, borrow more and withdraw earlier than other participants. Automatic enrollment and automatic contribution escalation programs have proven to be effective strategies for placing these participants on a more secure retirement savings path, though default contribution rates and subsequent increases should both be set at adequate levels that are higher than most plans currently use. In our related research (2018 DC Plan Participant Survey Findings), participants experienced high satisfaction rates with both automatic enrollment and automatic contribution escalation programs, and 80% of those with both features anticipated that their retirement savings would last throughout their lifetime, compared with only 47% of those who were just automatically enrolled.

On a positive note, plan sponsors appear to have a strong tailwind with higher earners in terms of getting these participants to start investing earlier at consistently higher levels and to stay invested as long as possible. This can help shape communication efforts targeting this group to increase contribution rates even more, since they are still falling behind recommended levels, on average.

In addition, the higher average frequency and percentage size of raises for participants across all salary ranges in their earlier career years points to a window of opportunity. Targeting younger participants to increase contribution rates at higher increments when their salaries are most likely to rise may help establish more constructive saving behaviors across their lifetimes.