Low Returns, Longevity Mean Greater Retirement Savings Rate Needed
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%.
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