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Measuring retirement resource adequacy

Published online by Cambridge University Press:  08 September 2008

PETER J. BRADY
PETER J. BRADY
Affiliation:
Investment Company Institute, 1401 H Street, NW, Washington DC, 20005, USA (e-mail: pbrady@ici.org)
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Abstract

To maintain their standard of living during retirement, it is often assumed that individuals need to save enough to replace 75–80% of their final pay. This paper develops a replacement rate measure that better corresponds with a replacement of consumption by properly accounting for savings, taxes, and owner-occupied housing. Savings and investment behavior judged by standard analysis to be inadequate is shown to result in high real consumption during retirement relative to pre-retirement consumption. For example, the simulated savings and investment behavior of single individuals in this study results in retirement income of about 60% of final earnings, well below the typical adequacy threshold of 75–80%. However, this corresponds to replacing about 90% of pre-retirement consumption for renters and over 100% for homeowners who have paid off their mortgage.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 9 , Issue 2 , April 2010 , pp. 235 - 262
Copyright
Copyright © Cambridge University Press 2008

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