Retirement Adequacy Through Higher Contributions: Is This the Only Way?
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Australia is increasing the legislated minimum and compulsory provision of retirement savings for employees (known as the superannuation guarantee, SG) from 9% to 12% of salary. Using a simulation approach, the article finds that retirement adequacy generally improves under the increased SG provision, particularly if a relatively favorable sequence of returns is experienced over the employee's working life. Using a variety of default options, the authors show that increasing the contributions of workers without appropriately altering the asset allocation strategy of their investments may expose them to greater sequencing risk, potentially undermining the objectives of the contribution increase. The retirement outcomes sought by increasing the SG can be achieved through a dynamic life-cycle approach to portfolio design without necessarily increasing the contribution rate.
Journal of Retirement