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Are retirement savers dumping too much into pension plans
| Published: | 18 Dec at 6 PM |
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Tagged: Study Abroad, Pension Transfer
A recent study by pension experts suggests that retirement savers may be putting too much of their hard-earned cash into pension plans due to an overestimate of their needs by financial advisors.
In order to predict the amount pre-retirees will need to save, financial advisors feed figures and other date into complicated algorithms unable to be understood by their clients. However, a recent study is querying the conventional wisdom underpinning such practices, resulting in savers putting aside far more than they will need.
According to the study, three key calculations – the fixed retirement period, the replacement rate and a constant consumption level – are too inflexible to lead to correct results. The end result from this much-used tool flies in the face of government data as well as analysis of the real costs involved in a comfortable retirement.
The replacement rate, a percentage of working income, is set between 70 and 80 per cent coupled to a 30-year saving term rather than to life expectancy, which would show at least 20 per cent less required income. Another problem is that, in real life, living costs depend on household expenditure, and not on algorithmics based on healthcare and inflation.
Put simply, what comes in goes out, and the amount is individualised by retirees’ needs, not by default calculations by FAs. Basically, the study confirms that later in the working life, at which time earnings will have improved by around 50 per cent, is the best time to start saving for retirement as it smoothes out savings and spending goals.
In order to predict the amount pre-retirees will need to save, financial advisors feed figures and other date into complicated algorithms unable to be understood by their clients. However, a recent study is querying the conventional wisdom underpinning such practices, resulting in savers putting aside far more than they will need.
According to the study, three key calculations – the fixed retirement period, the replacement rate and a constant consumption level – are too inflexible to lead to correct results. The end result from this much-used tool flies in the face of government data as well as analysis of the real costs involved in a comfortable retirement.
The replacement rate, a percentage of working income, is set between 70 and 80 per cent coupled to a 30-year saving term rather than to life expectancy, which would show at least 20 per cent less required income. Another problem is that, in real life, living costs depend on household expenditure, and not on algorithmics based on healthcare and inflation.
Put simply, what comes in goes out, and the amount is individualised by retirees’ needs, not by default calculations by FAs. Basically, the study confirms that later in the working life, at which time earnings will have improved by around 50 per cent, is the best time to start saving for retirement as it smoothes out savings and spending goals.
Comments » There is 1 comment
Rob wrote 10
years ago:
I agree on one hand and not on another. I agree if you have credit card debt and a mortgage you should pay them off first. Then put as much as you can into retirement. I disagree that if you do not have debt you should not save your money for retirement. Inflation goes up 3% to 4% annually, how much does you pay increase go up annually? So if you work another 20 years and your pay only went up 1% per year, in the simplest figures it only went up 20%. And in 20 years inflation goes up 3% that's is 60%. Who is going to cover that 40% spread? The government? I would not count on it. Its a lot like insurance, its better to have it and not need it, than need it and not have it. You can always leave it to your heirs.
