Required Retirement Savings Rates Today

Abstract

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.