Saving to Decumulate: a Lifetime Journey, Introducing the Perfect Contribution Rate and its Relation to the Perfect Withdrawal Rate 

24 Pages Posted: 17 Jun 2024

See all articles by Andrew Clare

Andrew Clare

City, University of London - Bayes Business School

James Seaton

City University London - The Business School

Peter N. Smith

University of York - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Steve Thomas

City University London - The Business School

Date Written: April 26, 2024

Abstract

This paper examines the relationship between the accumulation (the contribution) and decumulation (withdrawal) phases of pension saving across one's economic life. These are concepts which are usually considered 'independent' but for which we find a surprisingly strong empirical relationship generated most likely by the long-run mean reversion of returns. Using evidence from a long run of US data since 1870 we introduce the idea of a Perfect Contribution Rate which is the annual contribution required over one's savings' life which will allow the individual to achieve a real wealth target prior to the start of decumulation assuming perfect foresight of asset returns. In particular, there is an interesting positive relation between PCR and subsequent PWR which we believe reflects mean reversion in asset returns over long time periods. In other words, if an agent has to save larger amounts to achieve their target wealth since investment returns are poor, then typically the subsequent (possible) withdrawal rates may also be large.

Keywords: Pension accumulation, Decumulation, Sequence Risk, Withdrawal Risk, Mean Reversion

Suggested Citation

Clare, Andrew D. and Seaton, James and Smith, Peter N. and Thomas, Stephen H., Saving to Decumulate: a Lifetime Journey, Introducing the Perfect Contribution Rate and its Relation to the Perfect Withdrawal Rate  (April 26, 2024). Available at SSRN: https://ssrn.com/abstract=4861488 or http://dx.doi.org/10.2139/ssrn.4861488

Andrew D. Clare

City, University of London - Bayes Business School ( email )

106, Bunhill Row
London, EC1Y 8TZ
United Kingdom

James Seaton

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Peter N. Smith (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York 010 5DD
United Kingdom
+44 1904 433 765 (Phone)
+44 1904 433 759 (Fax)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Stephen H. Thomas

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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