Why Do Some People Save More Than Others?

Even with similar salary levels, new research finds large differences in the amounts that people save for retirement, which can have a big impact on savings rates over time.    

 

In an inaugural research report, “The 3% Difference: What leads to higher retirement savings rates?” the Employee Benefit Research Institute (EBRI) and J.P. Morgan find that—despite having similar salaries— the middle 50% of the research population save about 3% more of their salary at all ages than the bottom 25% of savers. 

According to the report, this 3% difference in savings behavior, if sustained over time, could ultimately explain some of the meaningful gap between the current retirement plan account balances of middle and low savers. 

 

Using 2016 data, the researchers compared information from about 22 million Chase households and the records for 27 million 401(k) plan participants to isolate an overlapping population of 1.4 million households. They removed households with insignificant employer plan balances, total spending of less than 50% of salary and those likely to have more than one earner.

 

Examining the resulting population of 10,000 households, they looked at behaviors by age cohort to try to find the “missing links” among salary, employee spending, savings and 401(k) balance. 

 

According to the findings, middle savers have higher median account balances at all ages than low savers do, with balances more than double those of low savers at ages 55–65. For high savers, the median account balances are four times those of low savers by age 60.

 

Additionally, the study finds that high savers peak at 401(k) balances that are more than four times their current salary by age 60, while low savers reach only one times their salary and middle savers reach about two times. 

 

 

The study observes that past research has offered tentative explanations of savings disparities, including an inability to save due to low income, prioritization of current spending needs over savings and challenges in navigating the DC system specifically and the overall savings system generally. 

 

But in asking what accounts for the gap between the median account balances of middle and low savers, even when they have similar salaries, the researchers suggest that meaningful differences in spending behavior “may well be the answer.” 

 

Using median salaries, the researchers estimated payroll deductions (federal, state and local taxes, and health insurance premiums) by age cohorts. They note that when these deductions were combined with observed spending and 401(k) contributions, there was likely no money left unaccounted for, suggesting that the 401(k) is the primary vehicle that participants use to save for retirement.

 

“As a result, we feel confident in concluding that the difference in spending between low and middle savers explains the lion’s share of the gap between their respective saving rates,” the researchers state. 

 

Low savers spend about 2% to 3% more of their salary than middle savers up to age 45. In term of specific spending categories, the research finds that low savers spend more as a percent of salary than middle savers on housing, transportation, food and beverage.  

 

Specifically, they note that housing costs for low savers are not consistently higher than for middle savers across the age cohorts, but at times the higher cost was notable. For example, while middle savers spend 16% of their salary on housing at age 25, low savers spend nearly 18%. Between ages 40 and 45, the housing category alone is a third of the contribution rate gap between middle and low savers, the paper explains. 

 

Spending on transportation as a percent of salary was also higher for low savers than middle savers across the age spectrum until around age 55, averaging about 0.7% more between ages 25 and 55.

 

Spending on food and beverages as a percentage of salary is around 0.4% more for low savers than middle savers across all age cohorts. 

 

As a percentage of salary, the research notes, low savers do spend less on travel, but the difference is a fraction of a percent less than middle savers spend.
The EBRI /J.P. Morgan researchers observe that as employers and others seek to help low savers to save more, it remains unclear how adjustable that spending may be. The factors could be due to being employed in higher cost areas, living farther from work for more affordable housing but facing higher transportation costs, or buying more food to feed bigger families.

 

Additionally, it could be choosing to eat out more frequently or buy more expensive cars or the latest home technology. Or, they note, it could be somewhere in between, and that additional research may shed some light.