Low Returns and Optimal Retirement Savings

[Pages:31]Low Returns and Optimal Retirement Savings

Title Goes Here

David Blanchett, Morningstar Michael Finke, The American College Wade Pfau, The American College

Retirement According to the Life Cycle Hypothesis

$

Wealth

Income

Saving Consumption

$ From Portfolio to Fund Spending

Dissaving

Retirement begins End of life

2

Wealthier People Tend to Live Longer

Change in average additional life expectancy (in years) at age 55, by wealth, between cohorts born in 1920 and 1940

Poorest 10% 11%-20% 21%-30% 31%-40% 41%-50% 51%-60% 61%-70% 71%-80% 81%-90%

Richest 10%

-2.1 -1.6 -1 -0.2

1.7 2.7

Women Men

3.3

3.6

0.5

3.9

1

4.2

1.4

4.6

1.8

4.9

2.4

5.3

3.1

5.9

-3 -2 -1 0 1 2 3 4 5 6 7 Change (in Years)

Source: Barry Bosworth, Brookings Institution 4

Asset Returns

Prices of Risky and Safe Assets are Higher

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$-

Cost of $1,000 Bond Income

Cost of $1,000 Dividends

Cost of $1,000 Earnings

1995-2015 1975-1994 1955-1974

Equities ? Shiller P/E

Avg = 16

$100 Stock Price

$6.25 in Profits Historically $2.87 Reinvested

$3.38 Dividends

$3.44 in Profits Today

$1.51 Reinvested

$1.95 Dividends

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