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Measuring Adequacy of Retirement Savings

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Author Info

  • John Burnett

    (Towers Watson)

  • Kevin Davis

    (Australian Centre for Financial Studies; Department of Finance, Monash University; and Department of Finance, The University of Melbourne)

  • Carsten Murawski

    (Department of Finance, The University of Melbourne)

  • Roger Wilkins

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Nicholas Wilkinson

    (Towers Watson)

Registered author(s):

    Abstract

    This article introduces four metrics quantifying the adequacy of retirement savings taking into account all major sources of retirement income. The metrics are applied to a representative sample of the Australian population aged 40 and above. Employers in Australia currently make compulsory contributions of 9.25 per cent of wages and salaries to tax-advantaged defined-contribution employee retirement savings accounts. Our analysis reveals that compulsory retirement savings, even when supplemented by the means-tested government pension and private wealth accumulation, are not in general sufficient to fund a comfortable lifestyle during retirement. We further find that omitting one or more ‘pillars’ of saving will significantly bias estimates of retirement savings adequacy. Our analysis also points to several shortcomings of the widely-used income replacement ratio as an indicator of savings adequacy.

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    File URL: http://www.melbourneinstitute.com/downloads/working_paper_series/wp2014n05.pdf
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    Bibliographic Info

    Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2014n05.

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    Length: 43pp
    Date of creation: Mar 2014
    Date of revision:
    Handle: RePEc:iae:iaewps:wp2014n05

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    Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
    Phone: +61 3 8344 2100
    Fax: +61 3 8344 2111
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    Web page: http://www.melbourneinstitute.com/
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    Related research

    Keywords: Retirement savings; financial literacy; life-cycle consumption and savings; household finance;

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    1. Carroll, Gabriel D. & Choi, James J. & Laibson, David I. & Madrian, Brigitte & Metrick, Andrew, 2009. "Optimal Defaults and Active Decisions," Scholarly Articles 4686776, Harvard University Department of Economics.
    2. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2006. "The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States," NBER Working Papers 12009, National Bureau of Economic Research, Inc.
    3. Basu, Anup K. & Drew, Michael E., 2010. "The appropriateness of default investment options in defined contribution plans: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(3), pages 290-305, June.
    4. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: the Roles of Planning, Financial Literacy, and Housing Wealth," NBER Working Papers 12585, National Bureau of Economic Research, Inc.
    5. John P. Haisken-DeNew & Markus H. Hahn, 2010. "PanelWhiz: Efficient Data Extraction of Complex Panel Data Sets - An Example Using the German SOEP," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 130(4), pages 643-654.
    6. James J. Choi & David Laibson & Brigitte C. Madrian, 2004. "Plan Design and 401(k) Savings Outcomes," NBER Working Papers 10486, National Bureau of Economic Research, Inc.
    7. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, vol. 91(4), pages 832-857, September.
    8. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," NBER Working Papers 11518, National Bureau of Economic Research, Inc.
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