Measuring Adequacy of Retirement Savings
44 Pages Posted: 1 Apr 2014
Date Written: March 1, 2014
This article introduces four metrics quantifying the adequacy of retirement savings taking into account all major sources of retirement income. The metrics are applied to a representative sample of the Australian population aged 40 and above. Employers in Australia currently make compulsory contributions of 9.25 percent of wages and salaries to tax-advantaged defined-contribution employee retirement savings accounts. Our analysis reveals that compulsory retirement savings, even when supplemented by the means-tested government pension and private wealth accumulation, are not in general sufficient to fund a comfortable lifestyle during retirement. We further find that omitting one or more 'pillars' of saving will significantly bias estimates of retirement savings adequacy. Our analysis also points to several shortcomings of the widely-used income replacement ratio as an indicator of savings adequacy.
Keywords: Retirement savings, financial literacy, life-cycle consumption and savings, household finance
JEL Classification: D14, D91, P46
Suggested Citation: Suggested Citation