PensionReforms' summary and comments
How much do we need to save for retirement?  For an individual, this isn't an easy question to answer.  The further we are from the age at which we think we want to stop working, the more difficult it is to answer.  There are so many imponderables; so many variables; so much the state might change between now and then.

Governments are in the business of helping their citizens to make those decisions through both direct provision (pensions); encouragement (tax incentives) and even compulsion.  Despite the huge resources that governments already apply, many observers say the baby boomers aren't saving enough so governments need to do more - others aren't so worried.  Who is right?

This report uses a lifetime smoothing of consumption model along with "a more sophisticated retirement program, ESPlanner, with special reference to retirement prospects for economists [true]."  It looks at individuals from age 40 on the presumed grounds that younger ages are just too far away from a retirement age for the calculations to be meaningful.  If there is a retirement saving 'gap', saving more is one option; the other is to expect a reduced standard of living in retirement.  The numbers are, however, based on many assumptions about assets, liabilities, other incomes, dependent status, retirement age etc.

"I find most households with post-graduate degrees fall short of the wealth needed to smooth spending through retirement. Of course, there are ways to economize during retirement: stepping up household production (cooking at home rather than eating out), selling one's house, or maintaining the modest individual consumption levels from when children still roamed the house. But ultimately, I argue these laudable strategies to reduce retirement expenses will be dwarfed by rapidly growing out-of-pocket medical expenses. The combination of eroding retiree health benefits and the risk of catastrophic future out-of-pocket health spending suggests that even conventional retirement planning recommendations could be too low."

The report provides a useful summary of the literature on the variables that might allow households to change consumption patterns after retirement.  Missing a savings 'target' set by a researcher may mean no more than a change in consumption levels or patterns.  

PensionReforms notes that whether lowering consumption is a 'successful' strategy can be discovered only by finding out whether retirees are constrained from doing the things they want to do in retirement.  Comparing post-retirement incomes with pre-retirement incomes seems less useful.

PensionReforms agrees that individuals need help to understand what their retirements might look like if they kept doing the things they are doing now.  The more accurate that can be, the better; the more variables that offers for the 'what if?' scenarios, the more comfort individuals might draw.

However, if the US government really wanted to help its citizens with their retirement saving plans, sorting out medical care costs seems to be the big issue for those contemplating retirement in America.  Planning for the present uncertainties seems beyond the resources of even academic economists. (File size 364 KB)  197