The U.S. savings rate has soared during the COVID-19 pandemic, making it a good time to save more for retirement, a new J.P. Morgan report explains.
The St. Louis Federal Reserve Bank says the savings rate was 20.5% in January, calculated as a percentage of disposable income.
In its latest Guide to Retirement, J.P. Morgan Asset Management says the savings rate was 15% in 2020, when calculated as after-tax income — which includes employee and employer contributions to retirement funds minus personal outlays.
Saving More, Spending Less
That reduction in spending during the pandemic can now help households identify where they can cut spending in order to save more for retirement and, once in retirement, avoid the risk of running out of funds.
Katherine Roy, chief retirement strategist for J.P. Morgan Funds, said in a recent webinar that retirees reduced spending by 2% to 9% during the pandemic, while steady earners have reduced spending by 1% to 6%.
The lesson for advisors: "Talk to pre-retirees about what spending is non-negotiable and where they can pull back should markets be more volatile in the future," Roy said.
She noted that retirees can adjust spending dynamically to compensate for portfolios performing poorly or for rising inflation, which increases the cost of products and services.
"Consider adjusting your spending strategy based on market conditions to help make your money last and provide more total spending through your retirement years," the J.P. Morgan Guide to Retirement advises.
Due to the increase in savings, the latest guide has reduced its assumptions for pre-retirement investment returns from 6% to 5.75%. It also examines what a couple today, in a certain age bracket and at a certain age, need to have saved to maintain their current lifestyle for 30 years of retirement.
Prepare for Higher Taxes
Another topic that advisors should discuss with their pre-retiree clients, according to Roy: higher taxes.
