When should individuals save for retirement?
Think tank: Institute for Fiscal Studies
Author(s): Rowena Crawford; Laurence O'Brien; David Sturrock
May 10, 2021
This report from UK think tank the Institute for Fiscal Studies looks at predictions on retirement savings from an economic model of household saving behaviour.
Most individuals need to save privately for retirement if they are to maintain their living standards when they stop working. There has been lots of research and discussion on how much individuals need to save, and how this compares with the saving being encouraged through automatic enrolment into workplace pensions. However, there has been little discussion of when individuals should save for retirement and the appropriateness of a single default contribution rate for all. In this briefing note, we use a life-cycle economic model to illustrate that there are good reasons for saving rates not to be constant over working life, due to predictable factors that change with age. The model is a simple approximation to real life, in that individuals face little uncertainty and can only save in one asset that has a known rate of return. Individuals choose how much to spend each year, and how much to save, with the objective of smoothing their living standards over their life cycles. While necessarily simple to be computationally tractable, this model yields important conclusions with implications for the design of real-world policies.