Required Retirement Savings Rates Today

David Blanchett

Morningstar Investment Management

Michael S. Finke

The American College

Wade D. Pfau

The American College; McLean Asset Management

October 17, 2016

Recent asset pricing studies suggest that demand for stocks since 1980 has driven expected returns below their historical average. The current yield of risk-free assets in the U.S. is also well below historical bond yields. This decrease in bond yields, coupled with increases in longevity, has doubled the cost of funding a real dollar of income in retirement since 1980 for a 65-year-old retiree.

Many common financial planning practices are surprisingly sensitive to asset returns, and advisors need to understand the challenges clients will face if high asset prices persist. Results from a life cycle planning model show that savings rates would need to rise sharply for households hoping to maintain the same standard of living in retirement if real asset returns are low. Low expected returns also have a surprisingly strong impact on the amount of savings needs to fund legacy goals and a negative impact on client spending throughout their life cycle.

Advisors may need to modify expected returns in planning software to provide clients with more realistic projections on meeting long-term spending goals.

Number of Pages in PDF File: 22

Keywords: Retirement Savings, Life Cycle Saving, Low Returns, Financial Planning, Household Finance

JEL Classification: D14, D91

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Date posted: October 18, 2016  

Suggested Citation

Blanchett, David and Finke, Michael S. and Pfau, Wade D., Required Retirement Savings Rates Today (October 17, 2016). Available at SSRN: https://ssrn.com/abstract=2853538

Contact Information

David Blanchett
Morningstar Investment Management ( email )
22 W Washington
Chicago, IL 60602
United States
859-492-5637 (Phone)
HOME PAGE: http://www.davidmblanchett.com
Michael S. Finke (Contact Author)
The American College ( email )
Bryn Mawr, PA 19010
United States
Wade D. Pfau
The American College ( email )
Bryn Mawr, PA 19010
United States
HOME PAGE: http://www.retirementresearcher.com
McLean Asset Management ( email )
8200 Greensboro Dr
# 1150
McLean, VA
United States
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