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How Much Should DC Savers Worry about Expected Returns?

Antti Ilmanen, Matthew Rauseo and Liza Truax
The Journal of Retirement Fall 2016, 4 (2) 44-53; DOI: https://doi.org/10.3905/jor.2016.4.2.044
Antti Ilmanen
is a principal at AQR Capital Management in London, U.K.
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  • For correspondence: antti.ilmanen@aqr.com
Matthew Rauseo
is a vice president at AQR Capital Management in Greenwich, CT.
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  • For correspondence: matthew.rauseo@aqr.com
Liza Truax
is an associate at AQR Capital Management in Greenwich, CT.
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  • For correspondence: liza.truax@aqr.com
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Abstract

Many defined contribution (DC) savers and plan sponsors implicitly assume that future long-term capital market returns will be similar to those observed in the favorable markets of the past few decades. In recent history, an unexceptional savings rate of 8% each year over one’s career, together with other common industry assumptions, would have allowed DC savers to reach a target retirement income replacement ratio of 75%. Unfortunately, current market yields indicate that both stocks and bonds may deliver lower returns in coming years. This may impact savers significantly: We quantify that roughly 2% lower expected returns could almost double the savings rate required over one’s working career to achieve this same 75% replacement ratio. We conclude by briefly describing some investment strategies that may help enhance portfolio returns.

TOPICS: Retirement, portfolio construction

  • © 2016 Pageant Media Ltd
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The Journal of Retirement: 4 (2)
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How Much Should DC Savers Worry about Expected Returns?
Antti Ilmanen, Matthew Rauseo, Liza Truax
The Journal of Retirement Oct 2016, 4 (2) 44-53; DOI: 10.3905/jor.2016.4.2.044

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How Much Should DC Savers Worry about Expected Returns?
Antti Ilmanen, Matthew Rauseo, Liza Truax
The Journal of Retirement Oct 2016, 4 (2) 44-53; DOI: 10.3905/jor.2016.4.2.044
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  • Article
    • Abstract
    • REPLACEMENT RATIO CALCULATION USING HISTORICALLY ANCHORED EXPECTED RETURNS
    • INCORPORATING UNCERTAIN FUTURE OUTCOMES
    • PARTICIPANTS CAN SAVE MORE OR TRY TO ENHANCE RETURNS (OR BETTER YET, DO BOTH)
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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