Academic journal article The Journal of Consumer Affairs

Does Calculating Retirement Needs Boost Retirement Savings?

Academic journal article The Journal of Consumer Affairs

Does Calculating Retirement Needs Boost Retirement Savings?

Article excerpt

Calculating retirement savings needs is often viewed as an essential first step in retirement planning. Yet, little empirical evidence exists to support the value of this activity. This case study examines the connection between calculating retirement savings needs and retirement savings through analysis of an online survey of benefitseligible employees at a large Mountain West university. Controlling for a variety of possible covariates, and using an instrumental variable approach, the case study shows that having estimated a retirement savings target increases self-reported retirement savings. The results provide support for financial educators and planners in their efforts to encourage people to estimate their retirement needs early in the retirement planning process.


Calculating the amount of money a person needs to accumulate by the time of retirement is typically considered one of the first, if not the first step, in the retirement planning process (Garman and Forgue 2010; Goff and Scott 1995). Accordingly, many free and easy-to-use retirement calculators are available; and if these calculators are too daunting, one can just multiply annual gross income by twenty to get a ballpark estimate (Sheard 2000). Yet, fewer than half of US households report having tried to calculate how much money they need to save for a comfortable retirement (Helman, Copeland, and VanDerhei 2010).

One reason why people may fail to estimate their needed retirement nest egg is a lack of evidence that this exercise is valuable. Indeed, there is not a strong research base documenting the value of calculating the amount of money required for a comfortable retirement. It is even conceivable that calculating retirement needs could discourage saving activities by identifying a savings gap that appears unbridgeable.

The purpose of this article is to investigate whether evidence supports the payoff in terms of increased retirement saving of calculating retirement needs. To answer this question properly, one must account for possible endogeneity, i.e., that more retirement savings may also increase the likelihood of making the calculation.


A few studies have measured whether individuals calculate the amount of money needed to retire comfortably. The most important of these measurement efforts is that of the Employee Benefits Research Institute (EBRI), which has asked this type of question in national surveys for almost 20 years. In the 2010 survey, 46% of respondents indicated that they and/or their spouse had figured out "how much money you will need to have saved by the time you retire so that you can live comfortably in retirement" (Helman, Copeland, and VanDerhei 2010).

Ameriprise Financial asked a similar retirement needs calculation question in 2005 and again in 2010 of national samples. In the more recent survey, 54% of preretirees said they had determined the amount of money they needed to save for retirement. In another study conducted in 2009, 42% of a national sample claimed they had tried to figure out how much they would need to save for retirement (Applied Research & Consulting LLC 2009).

Predictors of Estimating Retirement Savings Needs

Knowing the characteristics that predispose people to estimate their retirement needs is interesting in its own right, but it is also important for unraveling the cause-and-effect nature of any relationship between calculating retirement needs and other retirement planning variables. EBRI provides limited bivariate information on the demographic characteristics that predict whether a person has calculated how much she/he needs to save for retirement. In the 2010 survey, there are no differences between men and women in this respect (Gender Comparisons Among Workers 2010). Younger workers (aged 24-34) are far less likely to have estimated their retirement goal than older cohorts, despite younger workers being more likely to have defined contribution retirement plans than their elders (Age Comparisons Among Workers 2010). …

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