Data and Research

Are Saving More and Working Later the Only Options to Improve Retirement Readiness?

Researchers from State Street Global Advisors suggest policy changes that could improve retirement readiness for younger workers and late savers.

By Rebecca Moore | September 11, 2017
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In a Pension Research Council working paper, Catherine Reilly, senior investment strategist, defined contribution, at State Street Global Advisors (SSGA), and Alistair Byrne, head of investment strategy, European defined contribution, at SSGA, state that expected low market returns paired with increasing longevity will make it tougher for future retirees to have sufficient income replacement rates in retirement.

After performing an analysis based on certain assumptions so that only the effect of lower expected market returns is measured, the researchers find that a hypothetical individual currently 60 years old and who retires at age 65, having been saving since age 22, could expect to achieve a 211% replacement rate from his defined contribution (DC) savings alone. In addition, he can expect to receive Social Security and may well have some defined benefit (DB) plan benefits as well. The paper authors note that while few 60-year-olds may have been in a DC plan since the age of 22, they could have made contributions to a retirement savings account by themselves.

By contrast, an individual currently 25 years old and who employs the same saving strategy could expect to achieve a 27% replacement rate from his DC plan if he was to retire at age 65. Furthermore, the younger individual is unlikely to have any DB entitlements and faces more uncertainty regarding the amount of Social Security that he will receive. The researchers note a 45-year-old individual can expect better outcomes than the 25-year-old but is also disadvantaged compared to the 60-year-old.

The researchers contend that the most obvious tactics that younger workers could adopt to improve their situation are to contribute more and to work longer. For example, a 25-year-old could reach a 40% replacement rate by contributing about 13.5% and working until age 65; by contributing slightly above 10% and working to age 70, or by contributing about 7% and working to age 75. A 35- or 45-year-old benefits from stronger historical returns, so either can achieve the target replacement rate at slightly lower contribution rates. The researchers also note that individuals who start the retirement saving journey late face more challenges, yet they can also significantly improve their retirement readiness with a disciplined approach to saving and by postponing retirement.

However, this assumes consistent savings behavior during the entire working life, no career breaks, and no leakage from retirement savings.

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