How 'Critical' is Investment Return for a SMarT Plan

It has been known that individuals do not take a very active role in selection of retirement options. (Choi et al., 2004) It has also been noted that behaviorally individuals typically do not follow through with planned increases to their retirement savings. (Thaler and Benartzi, 2004) Given the contentious nature of Social Security and Social Security reform one might expect the increase in individual savings needed to offset the expected fall in benefits due to the decrease in the worker to retiree ratio to be rather high. In “OutSMarTing the Social Security Crisis” (Findley and Caliendo, 2007) showed this may not be the case. However I wanted to test the robustness of their results in a variable rate of return environment. Using a Monte Carlo analysis I have conducted a more in-depth sensitivity analysis of their model using random normal distribution for the rate of return of the agent's investments. In a more variable rate of return environment I find that there are larger extremes to the “Critical SMarT Rate”, but also a lower average critical rate needed as well. While numerous other assumptions can be made regarding investment returns and wage growth I hope the reader finds these assumptions reasonable and the results useful showing that in many cases the amount an individual needs to save to offset the fall in social security benefits is perhaps not as high as one might assume depending on the scenario