New research from J.P. Morgan finds that the majority of Americans need income replacement predictions, but most don't have access to the data or the understanding of how to translate their 401(k) savings into retirement income.
The company's new white paper, "Searching for Certainty," details the findings of an online survey of more than 1,000 individuals with 401(k) plans. J.P. Morgan found that participants wrestling with how to make their savings last through retirement were often completely in the dark.
Eighty six percent of respondents said they need to know how much of their pre-retirement salary they can replace, yet 22 percent aren't even sure what they will receive after they stop working. Overall, only 40 percent of respondents even feel comfortable that they will be able to reach their financial goals in retirement.
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Americans are also dangerously underestimating how much money they will need in retirement. Among respondents who had a target retirement income replacement level in mind, nearly half (45 percent) thought they would need less than 75 percent of their pre-retirement salary level. However, research shows that a minimum guideline for successful retirement income is a replacement ratio of at least 70 percent or more.
"On the positive side, some 91 percent of participants agreed that they were personally responsible for their own financial futures," said 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."
Other key study findings include:
- Two thirds of respondents admitted that they don't know how much they should be saving for retirement
- Nearly half of respondents are scared that they will outlive their retirement savings
- Of the participants who said they would need 75 percent-100 percent of their pre-retirement salary after they stop working, less than a third even had enough savings to provide this income
Because so many Americans are putting retirement on the back-burner, plan sponsors must step up to help participants. Most Americans have pushed aside retirement savings priorities, which rank a distant second to paying monthly bills. This is despite the fact that 401(k)s are the only or the primary source of retirement savings for two thirds of Americans.
Monthly bills, credit cards and mortgages are 71 percent of individuals' top priorities. With so many other financial priorities, it's difficult to convince participants that retirement should be important. 401(k) plan design is, therefore, essential to helping participants; programs such as automatic enrollment and autoescalation can make the difference between someone who can afford to retirement and someone who cannot.
Interestingly, according to the survey, 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 percent of non-qualified plan participants do not currently contribute to their primary defined contribution plan.
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