Optimal Life Cycle Savings

Abstract

How much should a family save for retirement? A prescriptive life cycle savings model is presented. Scenarios are developed with simulations to provide implications for personal financial planning. The percent of income to save today depends on the expected lifetime non-investment income pattern. Households who are sure that their real incomes will increase substantially in the future may be rational in not starting to save for retirement until 25 years before retirement. With uncertain future incomes and retirement ages, saving early may be rational. A computer program based on this model has been used in financial planning classes.

JEL Classification: D91, J26