Low Returns and Optimal Retirement Savings

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dc.contributor.authorBlanchett, David
dc.contributor.authorFinke, Michael
dc.contributor.authorPfau, Wade D
dc.date2023-05-17T21:43:44.000
dc.date.accessioned2023-05-23T00:30:05Z
dc.date.available2023-05-23T00:30:05Z
dc.date.issued2017-09-01
dc.date.submitted2019-02-13T12:54:49-08:00
dc.description.abstractLifetime financial outcomes relate closely to the sequence of investment returns earned over the lifecycle. Higher return assumptions allow individuals to save at a lower rate, withdraw at a higher rate, retire with a lower wealth accumulation, and enjoy a higher standard of living throughout their lifetimes. Often analysis of this topic is based on the investment performance found in historical market returns. However, at the present bond yields are historically lower and equity prices are quite high, suggesting that individuals will likely experience lower returns in the future. Increases in life expectancy, especially among higher-income workers who must also rely more heavily on their private savings to smooth spending, further increases the cost of funding retirement income today. The implications are higher savings rates, lower withdrawal rates, the need for a larger nest egg at retirement, and a lower lifetime standard of living. We demonstrate this using a basic life cycle framework, and provide a more complex analysis of optimal savings rates that incorporates Social Security, tax rates before and after retirement, actual retirement spending patterns, and differences in expected longevity by income. We find that lower-income workers will need to save about 50 percent more if low rates of return persist in the future, and higher-income workers will need to save nearly twice as much in a low return environment compared to the optimal savings using historical returns.
dc.description.commentsThe published version of this Working Paper may be found in the 2018 publication: How Persistent Low Returns Will Shape Saving and Retirement (https://pensionresearchcouncil.wharton.upenn.edu/coming-soon-persistent-low-returns-will-shape-saving-retirement/)
dc.identifier.urihttps://repository.upenn.edu/handle/20.500.14332/43682
dc.legacy.articleid1031
dc.legacy.fulltexturlhttps://repository.upenn.edu/cgi/viewcontent.cgi?article=1031&context=prc_papers&unstamped=1
dc.rights<p>All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2017 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.</p>
dc.source.issue31
dc.source.issueWP2017-05
dc.source.journalWharton Pension Research Council Working Papers
dc.source.statuspublished
dc.subject.otherretirement planning
dc.subject.othersaving for retirement
dc.subject.othersustainable spending
dc.subject.otherlifecycle finance
dc.subject.otherEconomics
dc.titleLow Returns and Optimal Retirement Savings
dc.typeWorking Paper
digcom.contributor.authorBlanchett, David
digcom.contributor.authorFinke, Michael
digcom.contributor.authorPfau, Wade D
digcom.identifierprc_papers/31
digcom.identifier.contextkey13815006
digcom.identifier.submissionpathprc_papers/31
digcom.typeworkingpaper
dspace.entity.typePublication
upenn.schoolDepartmentCenterWharton Pension Research Council Working Papers
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