Staying on the Path to a Secure Retirement: Using the Asset-Salary Ratio as a Retirement Compass

Hammond, P. Brett, and David P. Richardson (2009). "Staying on the Path to a Secure Retirement: Using the Asset-Salary Ratio as a Retirement Compass." TIAA-CREF Institute Research Dialogue #95, December 2009.

23 Pages Posted: 21 Feb 2015

Date Written: December 1, 2009

Abstract

The Asset-Salary Ratio (ASR) is a simple yet sophisticated metric that provides feedback on the likelihood a participant in a defined contribution plan system will have sufficient assets to generate adequate retirement income. Similar to the full-funding ratio of a defined benefit plan, the ASR provides an easily understandable measure for a participant to gauge whether she is “on-track” for accumulating sufficient retirement wealth. Applying this measure to a sample of TIAA-CREF participants, we find that, on average, participants had assets consistent with at least a 70 percent income replacement ratio; with this result holding across different ages, genders, and tenures.

We find the largest factors for success, by orders of magnitude, are an adequate contribution rate and long tenure in the system. A portfolio weighted to equities is also beneficial but to a far lesser extent. We conclude that a goal of plan design should be to ensure adequate funding and early participation rather than creating incentives for participants to “chase returns”. To this end, participant statements should include measures such as the ASR and retirement income projections in order for participants to make better, more informed choices.

Keywords: Life-Cycle, Retirement, Savings,Retirement Plans

JEL Classification: D91, D14

Suggested Citation

Hammond, Paul Brett and Richardson, David P., Staying on the Path to a Secure Retirement: Using the Asset-Salary Ratio as a Retirement Compass (December 1, 2009). Hammond, P. Brett, and David P. Richardson (2009). "Staying on the Path to a Secure Retirement: Using the Asset-Salary Ratio as a Retirement Compass." TIAA-CREF Institute Research Dialogue #95, December 2009.. Available at SSRN: https://ssrn.com/abstract=2567348

Paul Brett Hammond

Capital Group ( email )

333 S. Hope Street, 53rd Floor
Los Angeles, CA 90071
United States

David P. Richardson (Contact Author)

TIAA-CREF Institute ( email )

8500 Andrew Carnegie Blvd
E3/S8
Charlotte, NC 28262
United States

HOME PAGE: http://https://www.tiaa-crefinstitute.org/public/institute

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