Investors facing inflated asset prices, and the lower expected future returns they imply, must accept the reality that they will need to save more to maintain their lifestyle in retirement, researchers conclude.
In a research report, “Required Retirement Savings Rates Today,” written by David Blanchett, CFA [Chartered Financial Analyst], CFP [Certified Financial Planner], head of retirement research at Morningstar Investment Management LLC; Michael Finke, Ph.D., CFP, dean and chief academic officer at The American College of Financial Services, and Wade Pfau, Ph.D., CFA, a professor of retirement income, also at The American College, say a low-return environment and increases in longevity will affect optimal savings rates for investors.
They created a model to estimate the required savings rate needed to maintain the same level of take-home pay during retirement as the final year before retirement. Optimal savings rates using historical data for households that begin saving at age 25 are between 4.3% for low ($25,000) earners up to 9% for high earners ($250,000). Assuming more realistic returns (low returns) increases the optimal savings rate by 63%, to 7.0%, for low earners and for high earners by 82%, to 16.4%.
The results are even more dramatic if households wait until age 35 or 40 to begin saving for retirement. At 35, optimal savings rates rise to 24.1% in a low-return simulation compared with 14.3% using historical returns for a single worker. If the household waits until age 40, the optimal savings rate rises to 27.5%. Even in a moderate return scenario, optimal savings rates are 24.8% for a single household and 22.8% for a couple. NEXT: Low returns increase savings need as well as retirement income