Spending Their Future

Edmund Marsh

WHY DO SOME PEOPLE save more for retirement than others, even when their income is the same? It turns out that a difference in spending behavior, rather than a larger salary, may separate better savers from those who struggle to set aside funds for their future.

The Employee Benefit Research Institute and J.P. Morgan Asset Management joined forces to examine the spending and saving behavior of 10,000 households. The households, which were analyzed by age cohort, were divided into three groups based on the percentage of salary each contributed to a 401(k) plan. In the bottom 25%, low savers sock away about 2% to 3% of their income. Middling savers—those in the middle 50%—save about 5% to 6%. High savers, in the top 25%, start by contributing about 9% of salary and increase that amount as they get closer to retirement.

The researchers then compared the salaries of low and middling savers, and found that the two groups earn about the same. Yet, even though there’s only a small difference in salary between low and middling savers, at all ages middling savers sock away about three percentage points more toward retirement than low savers. This difference is meaningful down the road, as the two groups approach retirement age. Compared to low savers, middling savers accumulate twice as much by age 60.

What drags down low savers and keeps them from achieving the same results as middling savers, who earn an equivalent salary? The answer is spending. Low savers spend about 2% to 3% more of their salary than middling savers, especially when they’re younger. This difference in spending may account for the additional savings that middling savers set aside for their golden years.

The bulk of the difference consists of increased spending on housing, transportation, and food and beverages. Throughout their working years, low savers consistently spend more on these three categories than middling savers. Spending on other needs, such as education and clothes, is similar, while low savers spend slightly less on travel compared to middling savers.

It seems that, for some workers, spending is the culprit siphoning off money that should be used for savings. But it isn’t clear what’s driving this higher spending. Is it a desire to satisfy today’s immediate wants, such as a fancier car or pricey restaurant meals? Or do the necessities of life just cost more for some people, and therefore hamper their ability to save?

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