The Pudding Index™

As we thought about asset accumulations in defined contribution/IRA accounts, we came upon the idea of applying an index to measure the progress of individual employees. The index would involve an account that grows steadily from the start of a person’s working career until age 65.

In the real world individuals experience uneven pay increases, contribution patterns and investment returns. This experience pattern actually makes comparison to a benchmark more valuable. We calculate how much you would have in your account today if you had been in a plan that functions just like the index. Your actual account balance is higher or lower---the “proof is in the pudding”.

We chose Pudding Index™ as the name because it is easy to remember and is not stodgy like many financial industry terms. Odd, yes, but take the Pudding Index seriously! 

Lots of things! You need just a minute to spotlight your retirement savings against a benchmark that would produce a significant retirement income. The comparison is a measure of progress to date---unlike typical retirement calculators that require you to input many assumptions about the future. The result is expressed in a single number that you can discuss with other people without having to disclose your actual account balance or pay level.

The Pudding Index gives a snapshot assessment of the defined contribution assets you have accumulated to date. If you have a score in excess of 100 at age 45 or older, you should proceed to refine your planning by obtaining a more comprehensive financial analysis. If your score is significantly below 100 at any age, you should first put the result into context by considering other sources of retirement income you have (if any) and, in most cases, strongly consider taking corrective action by increasing contributions or improving investment returns.

The Pudding Index focuses on defined contribution accounts and IRAs. For most people in the private-sector labor force, these accounts will be their primary source of retirement income.

People who have pension benefits and/or real estate properties that can be converted to retirement income are fortunate. They will not have to rely as heavily on their defined contribution/IRA accounts. They can interpret their Pudding Score in the context of all their potential sources of retirement income. In many cases it will still be advisable to aim for a Pudding Score of 100 or higher.

The answer to both questions is yes. At every age, the Benchmark Account value is a multiple of pay. The multiple increases with age.

At age 65 your actual account balance will need to be more than 7 times your annual pay in order to have a Pudding Score at or above 100. Most people nearing age 65 today do not have balances approaching this level.

If you are age 25 or younger, you can achieve a Pudding Score of 100 with a retirement plan balance of just 10% (1/10th) of your annual pay. For you, the challenge will be to stay on a good course. The Benchmark Account will increase a lot in future years. You will have your work cut out to keep pace.

The Pudding Index™ is relatively new, but experience to date shows it is more common for a Pudding Score to be under 100. This early assessment will be refined as more data becomes available.

With few exceptions, the answer is no. A Pudding Score measures “career-to-date” progress in accumulating retirement assets. You should want your Pudding Score to be at least 100---preferably higher---at age 65, when career-to-date is pretty much your whole career. At younger ages, you have more future years to contend with. The Benchmark Account value is dynamic---it will grow in the years to come. And, the Benchmark Account is not subject to the “down” investment markets we sometimes experience in real life. Keep those contributions going---you will likely need them to protect against adversity in the years ahead!

The percentage of final pay---60% for men, 55% for women---requires the ability to buy an insured, single-life annuity at age 65 on a cost basis that reflects a 5% interest discount rate and a current mortality table. Annuity prices change frequently and depend on many factors, the most important of which is the prevailing interest rate environment.

Purchasing a single life annuity means benefits would be paid to you for your lifetime---no matter how long you live---with no further payments once you die. We did not envision an annuity that makes annual cost of living increases (also known as an “inflation-adjusted” annuity). For a given amount of assets available to purchase an annuity, the fixed annuity option would provide a significantly higher initial payout than would a more expensive inflation-adjusted annuity.  

Some professionals in the retirement industry believe we should peg the Benchmark Account to a higher level. They say individuals may be misled into believing a Pudding Score of 100 at age 65 will put them on easy street. People who retire with a score of 100 may not be on easy street, but neither will they be on a dead end street.

Annuity contract payouts are not a choice today, but interest is growing. There are many factors to be considered in deciding the payout approach that makes sense for you, and we encourage you to discuss the various approaches with a financial/retirement planner.