Low investment returns and the expected impact on retirement savings

Low investment returns and the expected impact on retirement savings

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Speaker: Alf Gohdes

-how the low investment return expectations impact the retirement savings planning of the man-in-the-street -   

This paper attempts to quantify the impact that lower investment return expectations have on the retirement planning of the average man-in-the-street in the world's rich countries and sketches out the consulting themes that emerge from this analysis.

The paper begins by considering the significant policy reforms implemented in the German first pillar arrangement, the state pension, almost 20 years ago. In particular, the difference between the expectations underlying the substitution of part of the pay-as-you-go state benefit by significantly subsidised personal savings arrangements are compared with today's expectations.

Most persons understand that the level of savings required to fill the retirement income gap expected today has increased significantly in comparison with that expected 20 years ago. But can the effect be quantifiable? The paper explains such an attempt. In doing so, the numerical results are presented under different investment allocation scenarios together with some basic sensitivity analyses.

Having performed this analysis for Euroland, the paper goes on to extend the findings to the other major currency areas: US, Japan and the UK. Interestingly, the results are largely transferrable with little modification.
What relevance has this for the consulting environment? First, it rationalises the discussion by quantifying what is intuitively understood by many already. Also, a small set of important assumptions is made explicit, so any actuary can apply the principles set out in the paper to an individualised assumption set. The paper also provides a platform from which broad social, corporate and personal retirement strategy can be considered.

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