Retirement Savings Shortfall

Gerald House MSM

Researchers continue to analyze the methods and procedures for calculating the ideal savings and investment rates needed for individuals without considering that life happens.  There are events and circumstances in our lives which determine our financial savings and accumulations once retirement approaches.  Therefore, more theories and assumptions are not going to change the fact most Americans are not financially prepared for retirement.  Pang, Gaobo, and Schieber (2014) discuss the numerous studies aimed at discovering the right mix of retirement withdrawal rates and portfolio allocation strategies.  One item which the authors discuss is the disproportionate allocations without considering the pre-retirement income of the individual.  Also, according to the authors, the life cycle accumulation models do not consider life events throughout the savers working life which may severely impact their savings rates such as caring for elderly parents or a sick child.  Poterba (2015) also discusses the fallacies associated with studies which purport to determine the right portfolio allocation and whether retirees are saving enough for retirement.  Poterba points out the heterogeneity of households which demands an individualistic approach to retirement preparation considering the earnings, wealth accumulation, health status, and consumption spending. 
Financial advisors and planners are accustomed to building elaborate models to calculate retirement shortfalls, however; there are too many assumptions in these models to render them usable.  For instance, how can we predict what tax rate someone will be in when they retire or what the average inflation rate will be over the savings life of an individual?  The best we can hope for is to invest in replacing our current income, after considering our financial situation today without forecasting into the future--other than considering Social Security and defined benefit plans.  Nonetheless, researchers will continue to make assumptions and build formulas to calculate the so-called ideal savings rates for an individual.  These methods, in my opinion, are just numbers in the wind.
As always—let me know if I can help.
References
Pang, Gaobo, and Sylvester J. Schieber, 2014. “Why American Workers’ Retirement Income Security Look So Bleak: A Review of Recent Assessments.” Journal of Retirement 2, 35-54. doi: https://doi.org/10.3905/jor.2014.2.1.035
Poterba, J. p. (2015). Saver heterogeneity and the challenge of assessing retirement saving adequacy. National Tax Journal, 68(2), 377-388. doi:10.17310/ntj.2015.2.06




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