Stuck at a Crossroads

In a recent white paper, J.P. Morgan explains that participants want income replacement projections, but don’t know how to translate their 401(k) savings into retirement income. 

J.P. Morgan survey data found that 86% of respondents said they want to know how much of their pre-retirement salary they can replace, yet almost one quarter (22%) aren’t sure what they are on track to receive after they stop working.  Overall, only 40% of respondents feel comfortable that they will be able to reach their financial goals in retirement.   

Americans are also underestimating how much money they will need in retirement, according to the data. Among respondents who had a target retirement income replacement level in mind, nearly half (45%) thought they would need less than 75% of their pre-retirement salary level.  However, J.P. Morgan research shows that a minimum guideline for successful retirement income is a replacement ratio of at least 70% or more.

“On the positive side, some 91% of participants agreed that they were personally responsible for their own financial futures,” says Diane Gallagher, vice president, product development, J.P. Morgan Retirement Plan Services. “However, there’s still a significant gap between acknowledging responsibility and acting upon it.”

The paper, titled “Searching for Certainty,” also discusses how two-thirds of respondents admitted that they don’t know how much they should be saving for retirement and that nearly half of respondents are scared that they will outlive their retirement savings. Of the participants who said they would need 75%-100% of their pre-retirement salary after they stop working, less than a third had enough savings to provide this income.

Largely due to the lasting effects of the recession, most Americans have pushed aside retirement savings priorities, which came in a distant second to paying monthly bills in the survey. This is despite the fact that 401(k)s are the only or the primary source of retirement savings for two-thirds of Americans.   

Interestingly, higher income employees are facing the most challenging shortfalls in closing the retirement income gap, which highlights the significant need for supplemental savings channels for this demographic.

Employees earning $165,000 annually cannot replace their salary on their 401(k) contributions alone, even with making catch-up contributions. As a result, the availability of a non-qualified plan is increasingly important with the full complement of savings plans working together.  According to J.P. Morgan’s research, however, 46% of non-qualified plan participants do not currently contribute to their primary defined contribution plan.

J.P. Morgan used data from an online survey of 1,014 respondents conducted from July 12 - 23, 2010. A copy of the J.P. Morgan white paper “Searching for Certainty” is available here.