Abstract
AbstractWe field a large online survey to study preferences and hypothetical product choices for phased withdrawal accounts and compare their demand to the demand of annuities. We find that most individuals prefer phased withdrawal accounts with dynamic withdrawal rates and equity-based asset allocation. Additionally, when offered the opportunity to exchange the phased withdrawal account with an annuity, most individuals decline to annuitize. Our results suggest that policymakers should consider offering combined solutions of phased withdrawals and annuities. Retirees who are averse to full annuitization could preserve some of their accumulated wealth while also acquiring protection against longevity risk.
Highlights
When conducting a simple Google search on the term ‘retirement planning’, one finds an overwhelming share of articles which contain recommendations on saving decisions and on how to allocate savings to increase financial wellbeing in retirement
A phased withdrawal account requires that retirees allocate a fraction of their retirement savings across various financial assets such as equities and bonds where the assets will earn returns depending on the chosen asset allocation
We focus on values of γ that are below 10, as this is the upper bound for risk aversion considered reasonable by Mehra and Prescott (1985), and restrict the intensity of the bequest motive to not exceed the benefit of own consumption by a factor of two
Summary
When conducting a simple Google search on the term ‘retirement planning’, one finds an overwhelming share of articles which contain recommendations on saving decisions and on how to allocate savings to increase financial wellbeing in retirement. 65% prefer dynamic withdrawal rates, which adjust the withdrawal amount based on realized returns in order to avoid depleting the capital stock too fast This choice pattern suggests that while retirees are highly averse to some risks (namely having to live on a permanently lower income) they are less risk-averse when it comes to equity investments with long planning horizons. We find that only 12% of all respondents would choose an annuity product to decumulate their wealth, while 88% would rather select a phased withdrawal solution This result – while surprising – is in line with subjects’ preference to be flexible in the way they decumulate wealth and with general findings on the annuitization puzzle.
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