A Framework for Setting Retirement Savings Goals

Abstract

The purpose of this paper is to develop a framework for calculating savings needed to meet retirement goals under a variety of alternative assumptions about the economic and institutional environment. A “base case” that incorporates a zero real rate of interest serves as a starting point; next, differences resulting from a positive interest rate are examined. The analysis is further modified to take into account the effects of inflation, the role of Individual Retirement Accounts (IRAs), and possible future changes in tax laws. Throughout, the goal is to evaluate how best to plan for a smooth, regular consumption level before and after retirement and to adjust savings programs for changes in one's situation or expectations. The framework provided herein is expected to be useful to consumer educators and financial counselors concerned with helping individuals to meet their retirement goals.