Life-Cycle Earnings Curves and Safe Savings Rates

The Journal of Retirement, Vol. 5, No. 3 (Winter 2018), 109-120

https://doi.org/10.3905/jor.2018.5.3.109

Posted: 21 May 2019

See all articles by Derek Tharp

Derek Tharp

University of Southern Maine

Michael Kitces

The Kitces Report & Nerd's Eye View; Pinnacle Advisory Group

Date Written: January 1, 2018

Abstract

Analyses of savings rates needed for successful retirement rates (SSRs) typically assume constant real earnings growth throughout one’s career. However, data on the life-cycle earnings patterns of millions of U.S. workers suggest that earnings growth does not occur at a constant rate that matches inflation. Instead, earnings tend to increase at a decreasing rate during the early years of one’s career and decrease at an increasing rate in the later years. Utilizing simulations of saving and dissaving throughout the life cycle based on both historical market returns and forecasted returns, the authors examine the impact of assuming more realistic earnings growth relative to constant inflation-adjusted growth. Results indicate that failing to account for more realistic earnings curves throughout the life cycle may overstate SSRs for lower-income households while understating SSRs for higher-income households, and understate SSRs for younger households while overstating SSRs for older households. Furthermore, historical SSRs of 10% or less are found for all but the highest-income households after accounting for more realistic earnings curves and Social Security benefits—though variations in specific effects may exist based on the simulation methods utilized.

Keywords: earnings curves, safe savings rates, life-cycle, retirement

JEL Classification: D14, D15

Suggested Citation

Tharp, Derek and Kitces, Michael, Life-Cycle Earnings Curves and Safe Savings Rates (January 1, 2018). The Journal of Retirement, Vol. 5, No. 3 (Winter 2018), 109-120. Available at SSRN: https://ssrn.com/abstract=3003301 or http://dx.doi.org/10.2139/ssrn.3003301

Derek Tharp (Contact Author)

University of Southern Maine ( email )

P.O. Box 9300
Portland, ME 04104-9300
United States

Michael Kitces

The Kitces Report & Nerd's Eye View ( email )

P.O. Box 2231
Reston, VA 20195
United States
703-375-9478 (Phone)

HOME PAGE: http://www.kitces.com/

Pinnacle Advisory Group ( email )

6345 Woodside Court, Suite 100
Columbia, MD 21046
United States
410-995-6630 (Phone)

HOME PAGE: http://www.pinnacleadvisory.com

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