National Savings Rate Guidelines for Individuals

Ibbotson, Roger; Xiong, James; Kreitler, Robert P.; Kreitler, Charles; Peng Chen
April 2007
Journal of Financial Planning;Apr2007, Vol. 20 Issue 4, p50
Academic Journal
This study creates savings guidelines for typical individuals with different ages, income levels, and initial accumulated wealth so the public can more easily determine how much to save for retirement. It also creates benchmarks for how much capital an individual would have accumulated based on their income and age, with the presumption that they started saving at age 35. Additionally, it shows targets for how much an individual should have accumulated at age 65, prior to retiring. The authors recommend that their findings be adopted as national savings guidelines. • The study differs from previous savings studies in several important ways. Perhaps most key is that the savings guidelines and capital needs are calculated on retirement income as a percent of net pre-retirement income--gross income minus annual retirement savings in pre-retirement. The study also uses Monte Carlo simulations and Ibbotson Associates' forecasted returns to calculate capital required for retirement. • The article calculates retirement cash flow using an 80 percent replacement ratio of pre-tax pre-retirement net income for a single person, along with other assumptions. As a comparison, it shows the difference in savings required for 60 and 80 percent replacement ratios without the pre-retirement net income approach. The study takes into account Social Security benefits, and shows that higher-income individuals need to save at substantially higher rates in order to offset the impact of Social Security benefits being skewed to lower-income individuals. • The study shows the urgency of starting to save no later than age 35. It also suggests that those whose income increases faster than inflation will have to save an increasing amount to "catch up" so as to be able to provide for the higher assumed standard of living in retirement. INSETS: Why Use Monte Carlo Simulations?;Returns in Real Life.


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