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Measuring Adequacy of Retirement Savings

Author

Listed:
  • 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)

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.

Suggested Citation

  • John Burnett & Kevin Davis & Carsten Murawski & Roger Wilkins & Nicholas Wilkinson, 2014. "Measuring Adequacy of Retirement Savings," Melbourne Institute Working Paper Series wp2014n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2014n05
    as

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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2014n05.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 32, July-Dece.
    2. Adam Butt & M. Scott Donald & F. Douglas Foster & Susan Thorp & Geoffrey J. Warren & Tom Smith, 2017. "Design of MySuper default funds: influences and outcomes," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(1), pages 47-85, March.
    3. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2016.

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    More about this item

    Keywords

    Retirement savings; financial literacy; life-cycle consumption and savings; household finance;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • P46 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty

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