Work-to-retirement ratio

Alex Pollock, a resident fellow at the American Enterprise Institute, suggests a simple tool for thinking about retirement savings: the work-to-retirement ratio.

Let's say a worker today enters the work force at age 22 and stays until age 62, for a 40-year working life:

  • If he lives to 82, he will need to finance 20 years of retirement; thus, the work-to-retirement ratio is 40 years divided by 20 years, or 2:1.

  • In the 1880s, when German Chancellor Otto von Bismarck instituted the first state-run retirement programme, the typical ratio stood at a far more favourable 27:1.

  • The smaller the ratio, the more of your current income you have to save.

    Given reasonable assumptions about wage growth, income needed in retirement and investment performance, a typical worker today must save 14 per cent of pre-tax income to finance retirement. The current savings rate is negative 0.5 per cent; that is, Americans are spending more than they earn, rather than saving, says Pollock.

    Source: Work-to-Retirement Ratio, The American, November/December 2006; based upon: Alex J. Pollock, Retirement Finance: Old Ideas, New Reality, American Enterprise Institute, Financial Services Outlook, September 25, 2006.

    For AEI study:

    For more on Economic Issues:

    FMF Policy Bulletin/ 09 January 2007
  • Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE