Individual Retirement Plans Research Articles

Retirement satisfaction as a quantified outcome of superior financial literacy: An empirical investigation

The purpose of the study is to create a viable and customised retirement planning system with financial literacy as the driver to achieve retirement adequacy and retirement satisfaction, taking into account the increasing financial needs of retirees. Perception regarding retirement choices necessitates sufficient self-efficacy to implement retirement portfolio decisions. Despite transformation in the way retirement is looked at, planning for retirement has taken a backward stride as individuals concentrate on their present needs rather than a holistic approach to life. The study implemented an online self-administered questionnaire for 770 participants using convenience sampling from India’s two major IT hubs, Bangalore and Chennai. The data samples were analysed using Partial Least Squares Structural Equation Model (PLS-SEM). The study evidenced a strong association between superior financial literacy and retirement planning and identified five essential financial behaviours, such as savings attitude, borrowing pattern, investment decision, insurance allocation, and spending behaviour, that strongly influence individual retirement planning. These behaviours lay the foundation for retirement readiness, lowered debt anxiety, and greater risk-bearing capacity. The results further reveal that individual’s satisfaction levels are significantly influenced by retirement adequacy. Therefore, it is imperative to formulate a well-structured retirement plan to attain retirement adequacy and satisfaction.

Surviving in financial advice deserts: limited access to financial advice and retirement planning behavior

PurposeThis study introduces the concept of financial advice deserts (FADs), including financial advice received from personal financial advisors (PFAs) and Certified Financial Planners™ (CFP professionals) and investigates the association between living in these FAD states and the retirement planning activities of individuals.Design/methodology/approachThis study uses merged data gathered from multiple sources including (1) available state-level information on CFP professionals from the CFP board website, (2) state-level information on PFAs from the US Bureau of Labor Statistics and (3) individual levels of retirement planning behavior and other personal characteristics from the 2018 FINRA National Financial Capability Study. Using web data extraction tools and logistic regression analyses, this study examines the association between a series of individual retirement planning activities and living in the FAD states.FindingsThe study found that living in the FAD states was negatively associated with both having retirement accounts and contributing regularly to retirement accounts. Overall, the findings of this study underscore the need for providing greater access to financial advice and improving financial literacy among financially marginalized populations who are residing in FAD states in the United States of America.Originality/valueThis study makes unique contributions to the literature by raising the issue of geographic inequality in terms of access to financial advice and introducing the innovative notion of FADs. The findings provide fresh insights into the understanding of retirement planning and preparedness from the perspective of state-level inequality of financial advice through PFAs and CFP professionals, thereby expanding the previous knowledge that emphasizes only individual- and household-level differences. Significant implications for public policies and practitioners are also discussed.

Modern Retirement Theory: Reaching Client Goals in Every Market

In contract to rational utility theory, prospect theory has shown individuals to be loss averse. Loss aversion and emotion often clouds an individual's financial decision-making. This paper offers an a priori framework approach to guide client's decision processes for individual retirement planning. The primary concepts of modern retirement theory (MRT) that individual financial plan be established on the basis of two individually unknowable facts: longevity and conditions within longevity. These facts are both unknown and unknowable in individual client terms. Advisors and planners can build more robust plans that balance work around these two concerns to provide retirees peace of mind through a liability matching process displayed in the MRT pyramid. The image of a hierarchical pyramid show the prioritization for the individual to offset individual retirement risks in an unknowable context. Four conceptual funds that can be used to offset the individually unknowable are: Base Fund, Contingency Fund, Discretionary Fund, and Legacy Fund.

Dynamic Asset Allocation with Regime Shifts and Long Horizon CVaR-Constraints

We analyze portfolio policies for investors who invest optimally for given investment horizons with respect to Conditional Value-at-Risk constraints. We account for non-normally distributed, skewed, and leptokurtic asset return distribution due to regime shifts. The focus is on standard CRRA utility with a money back guarantee at maturity, which is often embedded in individual retirement plans. Optimal solutions for the unconstrained as well as the constrained policy are provided and examined for risk management costs calculated as welfare losses. Our results confirm previous findings that money back guarantees yield mild downside protection at low economic costs for most long term investors.

The Influence of Culture and Mentality on Retirement Planning in Kazakhstan

The world is experiencing ageing phenomenal and the topic of individual retirement planning is becoming more important than before. Many studies focus on factors toward retirement planning, but limited researches studied how the culture and mentality influence the retirement planning in Kazakhstan country. This qualitative study has interviewed ten interviewees to explore how the culture and mentality concern contribute to their retirement planning decision. This paper entails the opinions and experiences about retirement planning among the younger generations in Kazakhstan.

The Separation of Intelligence and Control: The Retirement Savings Crisis and the Limits of Soft Paternalism

“Soft paternalism” is in vogue among academics and lawmakers, but too much is being asked of it. This Article studies soft paternalist techniques — including nudging and disclosure — that have been used in the employer-sponsored retirement system. Defined-contribution retirement plans represent an ideal test case for libertarian paternalism: there has been extensive experimentation, and it has often been held up as a success by nudge advocates. In particular, this Article focuses on investment allocation decisions in retirement portfolios, and suggests we should be skeptical of the ability of soft paternalism to improve those decisions. When a domain is rife with conflicts of interest — as in the allocation context — soft-touch strategies fare poorly. Since our tax-incentivized retirement system has paternalistic roots, we should more readily consider direct regulation of investment options available to retirement accounts. The migration of American retirement savings from centralized, risk-pooling structures (Social Security and pensions) towards individual retirement plans (401(k) plans and other tax-favored, individually managed accounts) had collateral consequences. In particular, the responsibility for making complicated financial choices was redistributed to the individual saver — who typically lacks the knowledge and sophistication to make such choices. The result has been that many savers make costly mistakes in investing their portfolios. In response, academics and policymakers, most formally through the Pension Protection Act of 2006, have turned to a variety of typical “soft” remedies, including nudges designed to improve investment decisions by allowing employers to automatically direct employee savings into certain default mutual funds.This Article argues that nudges have failed and will continue to fail in improving the allocation of retirement portfolios, because of problems that are common in many nudge programs. First, nudges rarely consider the ability of third parties to counter-nudge or to weaken nudge outcomes. Conflicts of interest are pervasive in the mutual fund and retirement industry, and those who accept the nudges are being pushed into a category of funds of dubious merit, and which appear to be worsening as institutions seek to exploit the default. Second, nudges are often loosely connected, or not connected at all, to the cognitive problems they seek to remedy. In the retirement allocation context, the nudge acts as a weak mandate for a substantive preference, rather than as a corrective for investors’ cognitive biases. Finally, nudging often asserts autonomy — taking an agent’s preferences seriously — as its central goal. But the claim that the retirement allocation nudges respect savers’ preferences is problematic as a descriptive matter, and illogical as a normative matter in a domain that is already a government-sponsored, tax-advantaged, paternalistic means to encourage retirement savings.

Fixer l’équivalence terminologique sur l’exemple des termes français et polonais du régime supplémentaire de retraite

This paper constitutes a kind of protocol, based on the author’s experience, which proposes to review several situations that occurred during her attempt to determine equivalence between French and Polish terms in the field of individual retirement plans. This attempt was made exclusively on various textual sources and their related data allowed to isolate a number of situations that differ in their details.

Individual Welfare Gains from Deferred Life-Annuities under Stochastic Mortality

At the end of the deferment period a deferred annuity’s policyholder can choose between receiving annuity payouts or the capital accumulated. Considering stochastic mortality improvements, this is a valuable option for the policyholder. Whenever mortality improves less than expected at contract inception, the policyholder will choose the lump-sum and buy an annuity at current market prices. Otherwise, he will retain the more favorable deferred annuity. We use a life-cycle model and calculate the welfare gains of deferred annuities considering stochastic mortality improvements. Deferred annuities are found to substantially improve the welfare of an individual. The option feature is especially valuable in the presence of adverse selection problems. The results derived are relevant for individual retirement planning and pension system design.

How Long Do We Expect to Live? A Review of the Evidence

How long people expect to live sets an important context for longevity risk in retirement planning and may contribute to the acceptability of policies to raise pension age. However, there have been few studies representative of a national population on subjective longevity. This paper reviews the available evidence. It finds that despite some studies reporting that subjective longevity is close to average measures in population life tables the prevailing tendency is to underestimate lifespans. Men generally reflect that they have lower actual longevity than women on average, but men are more optimistic, so that women are more likely to underestimate their likely longevity. People may take account of some mortality risk factors in estimating their own longevity, but appear not to understand the true extent of risk. There is little data on how people think about longevity or why they choose a particular estimate of their own likely lifespan. Thus, international evidence suggests potential for longevity risk in individual retirement planning and raises significant questions about the policy implications which can only become more acute in ageing populations.

A Framework for Assessing Individual RetirementPlanning Investment Policy Performance

Because there are more and more older people in Taiwan, how retirees can maintain their past consumption level is an important issue. This article assesses the performance of individual investment planning policies for retirement. Because factors such as investment performance, risk, and taxation must be considered in making investment policy choices, the authors apply the analytic hierarchy process (Satty [1980]) to design a framework for evaluating individual investment policy performance. The research findings show that the most important criterion is investment performance. These results provide some suggestions for retirement planning.

Individual Welfare Gains from Deferred Life-Annuities under Stochastic Mortality

At the end of the deferment period a deferred annuity’s policyholder can choose between receiving annuity payouts or the capital accumulated. Considering stochastic mortality improvements, the lump-sum option could be of potential value for the policyholder. Whenever mortality improves less than expected at contract inception, the policyholder will choose the lump-sum and buy an annuity at current market prices. Otherwise, he will retain the more favorable deferred annuity. We use a realistically calibrated life-cycle model and calculate the welfare gains of deferred annuities considering stochastic mortality. Our results are relevant for individual retirement planning, pension system design, and insurance pricing.

Managing Identity: Buying into the Brand at Work

Employment has shifted from a relatively stable and secure relation in which shareholders bore the risks associated with the market and firms buffered the risks vis-a-vis workers to a dynamic relation characterized by employment insecurity and individual responsibility. Modern businesses face new management challenges stemming from decreased employee loyalty and difficulties in supervising and controlling the workforce. Firms have responded by implementing internal branding programs that parallel consumer marketing programs but target workers rather than consumers. The goal of such programs is to re-align employees’ self-interest with that of the firm, persuading employees to internalize the firm’s brand so that they “live the brand” and react instinctively “on-brand.” Identity-based brand management, the most aggressive and potentially effective of the internal branding programs, aims to induce employees to view their employment as a personal relationship akin to a family tie, imbuing the economic transaction with emotional significance. In this psychological framework, workers’ decisions to invest in the firm - by staying and rejecting other labor market alternatives, and by purchasing company stock in their individual retirement plans - signify emotional attachment and faith rather than reflecting a cognitive process of choice. Understanding how identity-based brand management programs work sheds light on why employees consistently ignore conventional advice against over-investment in company stock in their individual retirement accounts, with potentially disastrous effects should the firm fail. The recent wave of “stock drop” litigation triggered by the recession reveals an even more disturbing trend: As the recession deepened, employees invested more, not less, in their firms. Despite its willingness to regulate consumer advertising and dissemination of information to shareholders, the law has steadfastly refused to regulate internal branding or the investment choices that it influences. The traditional justification for the law’s refusal to intervene to protect employees from losses stemming from over-investment in their firms has been that employees unilaterally choose to make these investments: They choose employment at a particular firm, they choose to remain at the firm, and they choose to invest in company stock. Drawing on research by management theorists, economists and sociologists concerning the potential for manipulation of employees’ psychological framework through identity based brand management, I argue that the law’s matrix of unilateral choice to invest at a particular moment in time is only half the story. Though employees are not mindless victims or dupes, their vulnerability to brand management programs that influence their frame of reference over time fundamentally alters the lens through which they view investment choices. Branded employees come to see their relationship with the firm in affective terms rather than as a market transaction, and their investments signify faith and loyalty rather than reflecting a reasoned choice between investment options. I contend that the absence of regulation is unsustainable, and sketch the contours of possible legal responses.

The impact of health on individual retirement plans: self‐reported versus diagnostic measures

We reassess the impact of health on retirement plans of older workers using a unique survey-register match-up which allows comparing the retirement effects of potentially biased survey self-reports of health to those of unbiased register-based diagnostic measures. The aim is to investigate whether even for narrowly defined health measures a divergence exists in the impacts of health on retirement between self-reported health and objective physician-reported health. Our sample consists of older workers and retirees drawn from a Danish panel survey from 1997 and 2002, merged to longitudinal register data. Estimation of measurement error-reduced and selection-corrected pooled OLS and fixed effects models of retirement show that receiving a medical diagnosis is an important determinant of retirement planning for both men and women, in fact more important than economic factors. The type of diagnosis matters, however. For men, the largest reduction in planned retirement age occurs for a diagnosis of lung disease while for women it occurs for musculo-skeletal disease. Except for cardiovascular disease, diagnosed disease is more influential in men's retirement planning than in women's. Our study provides evidence that men's self-report of myalgia and back problems and women's self-report of osteoarthritis possibly yield biased estimates of the impact on planned retirement age, and that this bias ranges between 1.5 and 2 years, suggesting that users of survey data should be wary of applying self-reports of health conditions with diffuse symptoms to the study of labor market outcomes. On the other hand, self-reported cardiovascular disease such as high blood pressure does not appear to bias the estimated impact on planned retirement.

Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality

A deferred annuity typically includes an option-like right for the policyholder. At the end of the deferment period, he may either choose to receive annuity payouts, calculated based on a mortality table agreed to at contract inception, or receive the accumulated capital as a lump sum. Considering stochastic mortality improvements, such an option could be of substantial value. Whenever mortality improves less than originally expected, the policyholder will choose the lump sum and buy an annuity on the market granting him a better price. If, however, mortality improves more than expected, the policyholder will choose to retain the deferred annuity. We use a realistically calibrated life-cycle consumption/saving/asset allocation model and calculate the welfare gains of deferred annuities under stochastic Lee- Carter mortality. Our results are relevant both for individual retirement planning and for policymakers, especially if legislation makes annuitization, at least in part, mandatory. Our results also indicate the maximal willingness to pay for the mortality option inherent in deferred annuities, which is of relevance to insurance pricing.

The Taxation of Individual Retirement Plans: Increasing Choice for Seniors

For many senior citizens, individual retirement plans, such as IRAs and 401(k)s, are a primary saving vehicle for retirement. Along with Social Security, individual retirement plans (IRPs) represent a major source of money for retirement. However, even though IRPs are a valuable saving vehicle for many seniors, many IRPs have one major drawback: the forced distribution of assets and the associated taxation of those assets for senior citizens at age 70-1/2 for traditional IRAs and the later of age 70-1/2 or the year in which the account holder retires for 401(k)s. This requirement forces many seniors to take distributions when they do not need them Worse, in cases of a down market, the forced distributions may require seniors to sell assets at depressed prices to pay taxes, even if investment losses have been incurred. This study addresses the minimum distribution requirement that effectively forces senior citizens to withdraw funds from IRPs or face a 50 percent excise tax, the reasoning behind the requirement, and the economic harm it can have on seniors, and some policy alternatives to this requirement that would help mitigate the bias against seniors and their retirement that this requirement creates. This study proposes several options that would either repeal or modify the minimum age requirement for forced distributions beginning at age 70-1/2. These options include: repeal, limited repeal, an increase in the minimum withdrawal age, a limited exclusion, a credit for excess withdrawals, allowing losses to be applied to other gains, and a grace period. Any of the proposals would enhance efficiency by providing seniors with the choice of determining when it is in their best interest to make a withdrawal from their IRP, how much to withdraw and subsequently pay the appropriate tax. The individual is in the best position to know when is the right time to elect to make withdrawals, not the government. Further, forcing seniors to sell assets in market conditions that have reduced their retirement plan assets may undermine the retirement security of seniors and produce less tax revenue to the government.

Pensions and Development in the South

The issue of how to organize pension provision and old age support in developing countries is increasingly coming to the fore. The demographic and epidemiological transitions underway in the developing world make this a pressing issue. Current population forecasts suggest that by the year 2050, there will be ten Latin Americans, 12 Africans, and 69 Asians aged 60 and over for every European in the same age bracket (Barrientos and LloydSherlock, 2002). The World Bank’s 1994 report on ‘‘Averting the old age crisis: policies to protect the old and promote growth’’ raised the profile of ageing as an issue in the context of development policy, but within an unfortunate context of ‘‘crisis’’ (World Bank, 1994). In the 1990s, a number of countries in Latin America and transition economies radically transformed their pension provision, and moved swiftly in the direction of privately provided individual retirement plans. However, pension reform has been embedded within structural adjustment, mainly as a response to fiscal deficits and labour market liberalization. This has narrowed the potential range of policy responses to demographic change available to developing countries. It is important to focus attention on the issue of pensions in the South from a development perspective. This paper uses a comparative perspective to draw attention to the variety of pension provision in the developing world, and to identify and discuss the main issues for pension reform in the South. The spread of pension reform in the 1990s, and the discussions that have attended it, have paid insufficient attention to the variety of pension provision in the South. The countries selected for this comparative study make this point well. Chile’s individual retirement plans have taken a paradigmatic role in pension reform among developing countries. Employees contribute a fraction of their earnings to a retirement account managed by private pension fund managers, which invest account balances in a range of financial assets in exchange for a management fee. At retirement, employees use the balance of their individual accounts to purchase an annuity. Singapore’s Central Provident Fund provides a different model of old age support. Compulsory payroll contributions are collected in a fund managed by the government, and the individual accounts are credited with a fixed rate of return. Affiliates can use their savings for a range of merit expenditures, including health, housing, and education. Individual retirement plans and the provident fund model reflect dominant models of pension provision in Latin America and South Asia respectively. Less conspicuous, but very important in the context of development policy, are the experiences of pension reform in South Africa and Brazil. In South Africa, the fall of apartheid led to the universalization of pension benefits, by abolishing the discrimination in entitlements and access to pensions suffered by blacks. The ‘‘social pension’’ provides a regular source of income to elders and their households, and is proving to be a powerful instrument of poverty reduction and development. The ‘‘social pension’’ has also led to a significant improvement in

Stock market timing effects on individual retirement plans: All holding period returns are not ‘average’

This paper suggests a win-win approach to dealing with stock market uncertainty in the advisory role of financial planning. It gives historical examples of holding periods where the stock market returns were above and below ‘average’ as suggested by Ibbotson Associates, Inc. stock return data. Examples are used to illustrate how conservative return estimates can provide safety for individual retirement plans and more assets under management for financial advisers. Suggesting conservative planned rates of return also protects the adviser against the many ‘accountability’ lawsuits that emerge during market declines.

An Exploration of an Individual's Decision-Making Regarding Tax-Deferred Investment Plans

Several decision making models are presented in this article for allocating an individual's savings in tax-deferred opportunities. Because the models are general, they can examine any number of tax-deferred opportunities. The resource allocation problem is formulated as a linear program. Historical or forecast values of costs and returns are used as exogenous parameters of the linear program. The model is simulated under different scenarios to demonstrate that the linear programming approach can be fruitful, simple, and insightful in bridging the gap between theoretical findings and actual investment in various tax-deferred opportunities. The Internal Revenue Code of 1954, as amended, allows certain groups of individuals the opportunity to defer tax liability on contributions to individual retirement plans. Interest income on these plans is also tax-deferred. While statutory limitations on maximum contributions must be satisfied, the result is not only an attractive device for supplemental retirement income but also a potentially important investment vehicle in an individual's investment

The Financial Feasibility of Tax-Sheltered Individual Retirement Plans: Comment

Gahin [2] offers an analysis of tax-sheltered individual retirement plans (section 403(b), IRAs, Keoghs, etc.) which focuses on the net cash flow (i.e., net present value, discounting for mortality and investment earnings). He concludes tax sheltered annuities (TSAs) are not an attractive savings mechanism for a younger individual whose tax rate will be higher following retirement. These results conflict with those of Adelman and Dorfman [1], who also examined tax-deferred annuities where the tax rate during the withdrawal years exceeded the tax rate during contribution years. Although Adelman and Dorfman ignored mortality, they concluded on the basis of internal rate of return measurements that even in the worse case the TDA performs well in time, and the unfavorable results only occur if one were to jump from a relatively low to a relatively high tax bracket in a short period of time just before withdrawing a TDA.(p. 89) The purpose of this note is to refine the work of Gahin to incorporate the deferral of taxes on investment earnings in tax-sheltered retirement plans, an advantage not recognized in the model. The results reaffirm the conclusions presented by Adelman and Dorfman.

The Financial Feasibility of Tax-Sheltered Individual Retirement Plans: A Reply

In her comment, Dr. Theresa Vaughan claims, in the first paragraph, that my results conflict with those of Adelman and Dorfman. Their article titled A Comparison of TDA and non-TDA Investment Returns appeared in the March 1982 issue of this journal. She contends that these two authors also examined tax-deferred annuities where the tax rate during the withdrawal years exceeded the tax rate during contribution years and concluded that even in the worst case the TDA (TSA) performs well in time. Adelman and Dorfman state, . . . the unfavorable results only occur if one were to jump from a relatively low to a relatively high tax bracket in a short period of time just before withdrawing a However, they never specified how much unfavorable, how big a jump, how much relatively low-high tax discrepancy, or how short that period is. In the absence of such specifications, their broad statement above sounds very much like my conclusion that TSA (TDA) is unfavorable when the investor's marginal tax rate after retirement (t') is higher than before retirement (t), on the basis of specific premises and assumptions (pp. 87-9). Each of these two models is based on certain assumptions and utilizes a different approach. Adelman and Dorfman were concerned with the internal rate of return measurements of tax-deferred annuities (TDA). This approach requires an estimation of the fund accumulation of benefits at retirement. In doing so the mortality factor of living to retirement (making contribution) and after retirement (receiving benefits) was ignored. Treating uncertain future cash flows as certain produces a favorable bias for TDA. On the other hand, the cash flow model in my article applies the investor's approach of investing in TSA only if the net cash flows (present value) after tax at the investor's opportunity net rate of return (discount rate), mortality,