Saving to Decumulate: A Lifetime Journey Based on the Perfect Contribution Rate

This article examines the relationship between the accumulation (contribution) and decumulation (withdrawal) phases of pension saving across a person’s economic life. These are concepts that are usually considered “independent,” but for which we find a surprisingly strong empirical relationship, generated most likely by the long-run mean reversion of returns. Using evidence from a long run of US data since 1870, we introduce the idea of a perfect contribution rate (PCR), which is the annual contribution required over a person’s savings’ life that will allow the individual to achieve a real wealth target prior to the start of decumulation, assuming perfect foresight of asset returns. In particular, there is an interesting positive relation between PCR and subsequent perfect withdrawal rate (PWR), which we believe reflects mean reversion in asset returns over long time periods. In other words, if an agent has to save larger amounts to achieve the target wealth when investment returns are poor, then typically the subsequent (possible) withdrawal rates may also be large. We also introduce the idea of the perfect retirement ratio (PRR)—the ratio of the PWR to the previous PCR—and find this to be highly time-dependent, with significant policy implications.