David Blanchett

There is an expression that as people age, they not only accumulate assets, but they also accumulate differences. This means that while people tend to have more wealth as they age, on average, their economic situations start diverging notably as well. This article explores this “accumulating differences” concept, leveraging data from the 2022 Survey of Consumer Finances 

There is relatively clear evidence that ideal recommendations around things like optimal savings rates and retirement ages widen at older ages. This points to the increasing potential benefit of solutions that can provide personalized advice for older investors, such as retirement managed accounts, as well as how strategies like dynamic default investments, which blend target-date and managed accounts, could be especially attractive (e.g., when pivoting based on age). 

Overall, while “one size fits all” strategies are quite common today, this analysis suggests that exploring more personalized solutions, in particular for older investors, is likely warranted! 

The Same … But Different 

As people age, their situations start to diverge based on life events, savings behaviors, etc. This divergence has important implications when thinking about the benefits of more personalized solutions, such as retirement managed accounts for participants in 401(k) plans, as well as when selecting the plan default investment (e.g., should the plan sponsor use a “one size fits all” solution like a target-date fund or something more personalized? A combination of both?). 

To better understand how household decisions should differ by age, consider data obtained from the 2022 Federal Reserve Survey of Consumer Finances, prepared by the Federal Reserve Board’s Division of Research and Statistics. The SCF is a triennial cross-sectional survey of U.S. families, producing detailed information on household finances. It provides a better understanding of which sources of information households are using to make financial decisions.  

Several filters are included when determining the test sample. First, while the SCF includes five different instances (technically called “implicates”) for each household, only the first instance for each household is used, as a simplifying assumption. Second, only respondents between the ages of 20 and 60 are included. Third, total household wage income must be between $20,000 and $1 million. A total of 2,111 respondents met these filters. 

We use this sample to determine how required savings rates and optimal retirement ages vary by household, based on a number of additional assumptions. For example, we assume wages grow by 1% per year until retirement in real terms, consistent with the historical change in the National Average Wage Index. We also assume a constant 4% real return for the portfolio. 

Social Security retirement benefits are based on wage history, assuming a claiming age of 65, which is also the base assumed retirement age (although varied for one of the tests.) The retirement goal is based on a model in which the target, as a percentage of income, declines at higher wage levels. For

example, someone with an income target (defined as income minus savings) of $25,000 would have an 86% replacement rate target, and someone making $250,000 would have a 68% replacement rate target. The goal is assumed to be reduced by the level of savings to reflect assumed take-home pay. 

Total financial assets are assumed to be available to fund retirement for the household, which is assumed to last 25 years. Taxes in retirement are ignored. 

First, we solve for the required savings levels necessary for each of the 2,111 respondents to achieve the same target level of spending in retirement as in pre-retirement (technically the year before retirement). As the savings rate increases, spending is assumed to decrease, so the retirement goal becomes increasingly manageable at higher assumed savings levels.  

The exhibit below provides some perspective on the distribution of assumed required savings rates by age.  

Required Savings Rates by Respondent Age

Source: 2022 Survey of Consumer Finances (SCF), Author’s Calculations.

There is a significant increase in the dispersion of required savings rates for older households. For example, if we focus on the 25th and 75th percentiles, which would include half of the households, the difference in required savings rates among those who are ages 30 to 34 is approximately three percentage points (so relatively tight). In contrast, the difference between the 25th and 75th percentiles in required savings rate among those who aged 50 to 54 is approximately 22 percentage points, roughly seven times as much. 

Next, we explore how retirement ages would vary by respondent, holding the retirement end age constant at age 90 and assuming a constant savings rate of 10%. We solve for retirement ages from 60 to 85. The results are included in the exhibit below. 

 Recommended Retirement Ages by Respondent Age 

Source: 2022 Survey of Consumer Finances (SCF), Author’s Calculations.

Again, we see the dispersion in recommendations increases as age increases. A key driver of the growing dispersion is the simple fact older respondents have fewer levers at their disposal to accomplish a given retirement goal. They have either been saving effectively or have not, and they are going to have to make decisions regarding their retirement with more clarity.  

Now What? 

This piece demonstrates that advice and recommendations are likely to be increasingly varied among investors as they age. These differences stem from the collective differences in economic situations of households over time. While this analysis focuses on required savings levels and optimal retirement ages, the analysis could easily be extended to decisions made about optimal portfolio risk levels, as well as other decisions. 

While more personalized solutions, such as managed accounts, typically include an additional fee for the service, this fee must be weighed against the perceived value of the personalization. This analysis suggests that while investors of all ages could potentially benefit from personalized guidance, it is older investors who are likely to benefit most and likely most need access to these solutions. 

David Blanchett is a portfolio manager and head of retirement research at PGIM DC Solutions.  

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.