Setting Realistic Goals for Personal Retirement Planning via Micro–Macro Analyses

Abstract

The vulnerability of individuals planning for retirement has been growing as a result of the conversion from defined-benefit plans to defined-contribution plans, the steady increase in life longevity, and the uncertainty of asset returns under an ever-changing global environment. A serious problem is the lack of appropriate planning for retirement. How much should an individual in the United States save beyond the Social Security tax to maintain a reasonable lifestyle after retirement? The article designs a framework to facilitate the process of setting realistic goals for retirement planning, featuring the concept of agent-based simulations. Focusing on policy-rule-based investment strategies, the simulation framework includes multiple investable asset categories and explores dynamic allocation based on the investor’s age, current salary, and Social Security accumulation situation. Empirical results demonstrate a stylized application of the planning framework. TOPICS: Long-term/retirement investing, pension funds, portfolio management, retirement, Social Security Key Findings • Demonstrates the advantages of agent-based simulation models for addressing the survivability of pension plans. • Compares dynamic and adaptive strategies for integrating saving and investment decisions. • Provides a clear example of goal-based investing for individuals and for institutions such as the US Social Security System.