Retirement saving

Increasing retirement readiness through higher savings rates and TDFs

October 18, 2023

This chart illustrates the sustainable replacement rates achieved if millennials save at rates that are within the recommended range of 12% and 15% for retirement. Increasing savings to 12% of income increases the sustainable replacement rate for millennials in the 25th income percentile from 64% to 78% of pre-retirement income, a 14 percentage-point improvement. A bump in the savings rate to 15% boosts the sustainable replacement rate 5 percentage points to 83%. This translates to a huge reduction in the retirement savings gap, from 32 percentage points to 13 percentage points. Saving between 12% and 15% also has a substantial impact for middle-income workers, increasing their sustainable replacement rate to between 62% and 67%, respectively. There is only a negligible impact on higher-income millennials, who would typically be saving amounts at or close to recommended rates (for the 70th income percentile) or substantially exceeding the rates (for the 95th income percentile) for the remainder of their working years.
This chart presents the effect of investing retirement savings in a TDF on the retirement savings gap and offers three key insights: 1.The combined impact of increasing savings rates and investing in a TDF is dramatic for millennials, especially for low- and middle-income earners, who can meet and even exceed their spending needs replacement rate if they save 15% of their income and invest in a TDF. Saving at the 12% lower bound of the recommended range and investing in a TDF closes the retirement savings gap considerably, reducing it to 2% and 6% for the low- and middle-income cohorts, respectively. Though they already save at rates close to the recommended range, the high-income group (70th percentile) can exceed an individual’s retirement savings needs by 14 to 15 percentage points if they invest their savings more heavily in asset markets. Even the highest-income group (95th percentile) could benefit from reducing their cash holdings and increasing their holdings in stocks and bonds, although the projected retirement wealth of this cohort already far exceeds their retirement spending needs.   2. Although a TDF asset allocation amplifies the impact of higher savings, the main driver in closing the retirement savings gap is increasing the savings rate. Based on empirical or actual savings rates, we estimate that a worker in the bottom quartile for income (25th percentile) invested solely in a TDF at the less than 5% empirical savings rate would reduce their retirement savings gap by 6 percentage points. By comparison, increasing the worker’s savings rate from empirical rates to 12% with no change in asset allocation shrinks the retirement savings gap by an even greater 14 percentage points.   3. A TDF asset allocation has a larger marginal impact on the long-term retirement readiness for lower-income workers than higher-income workers. Lower-income workers tend to be more heavily invested in cash and stand to gain more from investing in a TDF.


Kate McKinnon, Ph.D.
Andrew S. Clarke, CFA, CFP®
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