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 >
 

Most assets leave within three years of retirement

Withdrawals have the greatest impact on cash flow volatility, since they permanently remove assets from participants’ accounts. This year’s research was consistent with past trends that found that the majority of participants made substantial withdrawals soon after retiring. Most also took all of their account assets within three years. Our latest research found that:

  • the average participant withdrew more than 55% in any given year at or soon after retirement
  • only 28% of participants remained in the plan three years after retirement
  • most participants who remained in the plan after age 70 started to follow required minimum distribution (RMD) withdrawal rates, though there is some variability

Looking at withdrawals from an age perspective, we again found that once participants reached 59½, distributions were substantially higher than general industry expectations. At age 60, 9% of participants withdrew an average of 51% of their account balances, with 23% of that 9% taking out 100% of their assets; at age 65, 13% of participants withdrew an average of 57% of their balances, with 35% of that 13% taking out 100% of their assets; and by age 70, 52% of remaining participants withdrew an average 33% of their balances, with 20% of that 52% taking all of their assets.

Key finding: Participants still withdraw most of their assets around retirement, and we continue to see great variability of how people withdraw

EXHIBIT 8: MIX OF TYPES OF WITHDRAWALS
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Note: Due to full withdrawals, at age 65, the number of participants included in the analysis decreases to 47% of the population we examined at age 60. At age 70+, the population has decreased to 24%. Total may be more than 100% due to rounding.
Source: J.P. Morgan retirement research, 2015–17.

Where are assets going?

In our related research (Three ways to manage spending volatility as clients transition into retirement), based on proprietary, anonymized Chase data of nearly 60,000 households, we found that spending may change as people adjust to a new phase of life. First, we found median household spending increases six to 12 months prior to retirement and then declines and remains in a more steady state one to two years after retirement.

Key finding: Evidence of spending surge at retirement

EXHIBIT 9: MEDIAN SPENDING ROLLING PERIODS BEFORE AND AFTER RETIREMENT
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Note: For those who retired age 60–69. Percentages may not add to 100 due to rounding.
Source: Chase credit card, debit card, electronic payment, ATM withdrawal and check transactions from October 1, 2012 to December 31, 2016. Outliers in each asset group were excluded (0.1% of top spenders in each spending category). Information that would have allowed identification of specific customers was removed prior to the analysis. Excludes some co-branded cards.

As we looked beyond the median, we found the majority (56%) experienced spending volatility: temporary spending changes of more than 20% in the years after retirement compared with the year before retirement. Those who experienced spending volatility were about evenly split between those who increased spending temporarily (26%) and those who decreased spending temporarily (23%) in one or two of the three years after retirement, while 7%, dubbed the roller coasters, had both spending ups and downs. The remainder either decreased spending consistently (15%), increased spending consistently (9%) or stayed fairly steady (20%) during the three years post retirement.

Key finding: Most had spending volatility when adjusting to a new phase of life

Exhibit 10: Post-retirement spending volatility

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Note: For those who retired age 60–69. Total may be more than 100% due to rounding.
Source: Chase credit card, debit card, electronic payment, ATM withdrawal and check transactions from October 1, 2012, to December 31, 2016. Outliers in each asset group were excluded (0.1% of top spenders in each spending category). Information that would have allowed identification of specific customers was removed prior to the analysis. Excludes some co-branded cards.

Based on these findings, the conventional view that assets leaving a plan are usually rolled over into an individual retirement account (IRA) may be inaccurate. The bottom line is that spending often increases around the point of entering retirement, and the money leaving plans as participants near and reach retirement age could easily be funding this spending volatility.

Implications for plan sponsors

These numbers illustrate the highly personal nature of retirement spending. While many participants are quick to cash out from their plans, some take nothing until required minimum distributions prompt withdrawals. Some roll over their assets into other retirement accounts, and some appear to use them to help fund increased post-retirement spending.

Plan sponsors and their advisors/consultants should incorporate the full range of these behaviors into plan design, including evaluating appropriate levels of equity exposure in target date fund glide paths. Given the large withdrawal volumes and wide variance in spending patterns, tightly managing volatility exposure and drawdown risk can be incredibly important in the years leading up to retirement and immediately after. Participant assets are most vulnerable to account losses at this point, a risk that can be greatly amplified if sizable withdrawals are made after valuations fall due to equity market declines (discussed further in our related research Glide path design: Why “retirement” shouldn’t mean “decline”).