Investing for Retirement in a Low Returns Environment

Abstract

Low returns on financial assets and increasing longevity mean saving for retirement is becoming more challenging than it has been in the past. Generations retiring in the near term face increased longevity but have lived through periods with strong market returns boosting their assets, and many also have defined benefit plan entitlements. Younger generations, who also face increasing longevity, are unlikely to earn historical investment returns on their retirement portfolios, and few have traditional pensions. We model the likely outcomes for different cohorts under scenarios for savings behavior, investment returns, and longevity. While younger generations do face substantial challenges, we show that plausible courses of action involve increased contributions and delayed or partial retirement, which can provide reasonable income replacement rates in retirement. We map out the steps that the retirement industry (government, employers, and financial services providers) must take to support people in following these courses of action, such as providing more flexibility over social security.