A report on retirement savings behavior has found that a difference of just three percent of salary in how much is saved through a career can make a substantial difference in retirement security.
The study, by the Employee Benefits Research Institute and the JP Morgan financial company, broke savings levels for given salary levels into fourths, finding that those in the middle two fourths saved 3 percent more of salary that those in the bottom forth. “This 3% difference in savings behavior, if sustained over time, could ultimately explain the fact that the current retirement plan account balances of high tenured middle savers are almost two times larger than those of high tenured low savers,” it said.
While the report did not specifically reference the TSP, it involved similar types of retirement savings programs. The TSP has repeatedly called on federal employees to make the most possible use of the program, especially FERS investors who can capture government matching contributions of up to 4 percent of salary (in addition to an automatic 1 percent government contribution) by investing at least 5 percent of their salary.
That motivation was behind the TSP’s policy change years ago to require “default” personal contributions of newly hired federal employees of 3 percent of salary, which captures the dollar-for-dollar match under the FERS formula. The default rate is to rise to 5 percent in September to capture the full match; however, as under the current policy, newly hired employees will remain free to decide on their own level, including making no personal investments.
The report said that among all such plans, the bottom quarter of investors in any given salary level save about 3 percent of salary less than the middle two quarters, and that in each case, savings increase as they approach retirement. But by age 60 lowest quarter had saved on average only about an amount equal to their 1.1 times annual salary, while the middle two quarters had saved 2.1 times that amount.
It added that the lowest quarter “spend more as a percent of salary on housing, transportation and food and beverage, and less on travel.” It said that in some cases that might be for reasons outside a person’s control—such as living in a high-cost area—but that in others the difference might be within personal control—such as “choosing to frequently eat out and buy more expensive cars or the latest home technology.”