Retirement Wealth Accumulation Research Articles

Are You Saving for Retirement? Racial/Ethnic Differentials in Contributory Retirement Savings Plans.

How individuals and families accumulate retirement resources during working years is a key aspect of aging with implications for later life. This study examines how much, and by what mechanisms, savings in retirement plans vary by race/ethnicity. Using representative survey data and linked W-2 tax records, we estimate the probability of participation in employer-sponsored defined contribution (DC) retirement plans with probit regression, and contribution levels with ordinary least squares (OLS) models. We use Heckman models to adjust for potential sample selection. Black and Hispanic workers have lower participation and contributions in employer-sponsored DC retirement plans than do white workers, while Asian Americans have higher levels. The bulk of racial/ethnic differences is attributed to socioeconomic position, especially education and labor market circumstances like earnings. Differentials are also associated with family circumstances, namely for black workers. After accounting for education, labor market, and family covariates, social-psychological factors appear to explain only small portions of differences, especially for black and Hispanic. This study clarifies how racial/ethnic disparities in socioeconomic circumstances generate advantages and disadvantages in retirement wealth accumulation. Lower DC retirement plan participation and contributions among minorities in work life represent an underappreciated earlier-life channel through which racial inequalities in income and wealth in later life are generated.

Automatic enrollment and job market turnover

AbstractAutomatic enrollment has substantially increased employee participation in defined contribution plans. Yet little is known about how retirement plan design features influence retirement wealth accumulation in a setting of labor market turnover. We find that employees separating from jobs with automatic enrollment plans are significantly more likely to take a cash distribution (and potentially pay a tax penalty) than those separating from jobs with voluntary enrollment plans, offsetting some of the benefits from automatic enrollment. Yet given the sizeable improvements in plan participation from automatic enrollment, wealth accumulation for automatically enrolled participants, net of cash-outs and penalties, remain higher than it would have been under voluntary enrollment.

The Bigger Picture: How the Fourth Pillar Impacts Retirement Preparedness

In the face of declining private-sector pension coverage, policymakers have expressed concerns about a perceived lack of voluntary savings for retirement, through vehicles such as Registered Retirement Savings Plans (RRSPs). This gap has fueled the policy debate around broad-based compulsory solutions, such as the Canada Pension Plan expansion or the Ontario Retirement Pension Plan. But other sources of wealth, although not accumulated explicitly for the purpose of supporting retirement, can also play an important role once people stop working. Included are real estate, taxable financial investments, privately owned businesses, other durable assets, and tax-free savings accounts. Employment and business earnings, insurance products, inheritances and other family transfers can all play a role in funding asset accumulation. These additional sources of wealth have been labelled the “fourth pillar” of retirement income by retirement experts. Relying on publicly available survey data, this Commentary studies the impact of fourth-pillar assets on retirement wealth for households relying primarily on voluntary savings. Our findings suggest that fourthpillar assets may significantly improve assessments of households’ retirement readiness and that not giving them full consideration would be an important oversight. About 39 percent of non-retired 35-to-64-year-old Canadian households will be primarily drawing from voluntary retirement savings and private wealth to sustain their retirement. Because of the voluntary nature of their retirement arrangements, these households are often labelled by policymakers as the group most at risk of unsatisfactory retirement outcomes. But once we factor in wealth already accumulated from all sources, we can estimate the number of households in this group still at risk of insufficient retirement wealth. More than 40 percent of them have potentially already accumulated sufficient wealth (net of debts) in RRSPs, real estate, other tangible assets, financial assets and business assets. They would likely fare well in retirement, compared to their working years, without any more savings. This means that a sizeable proportion of households targeted by policymakers as most at risk of retirement income insufficiency are in fact already in good financial shape. In total, this leaves about one-in-five employed 35-to-64-year-old households, most of them in the upper-income quintiles, likely needing to accumulate more retirement capital on a voluntary basis. Therefore, when reflecting on claims that Canadians lack adequate savings for retirement, it is crucial to ask whether fourth-pillar assets have been fully considered in reaching this conclusion. Mandating new retirement wealth accumulation through one channel, such as CPP expansion, may impact accumulations in other channels for households already satisfied with their current tradeoff of future versus present consumption. Because households accumulate wealth in diverse ways and face various circumstances, the impact of fourth-pillar assets on the big picture is far from negligible and should not be ignored.

Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work

The aim of traditional retirement planning is to set a wealth accumulation target for your retirement date so that your desired expenditures can be obtained using a “safe” withdrawal rate. But it is quite difficult to know if you are making progress toward this target. Volatility over short periods of time strongly limits the usefulness of using your current wealth accumulation at ten or even five years before retirement to predict your final retirement wealth. Fortunately, it is not necessary to focus on a retirement wealth accumulation target. The accumulation and retirement phases should not be treated separately in this way. This paper outlines a framework for considering if someone in mid-career is on track for a sustainable retirement. It investigates what combinations of savings rates and years of continued work would have allowed someone to have always accumulated enough by retirement to afford one’s desired retirement expenditures in all of the rolling periods from the historical data. A strategy is “safe” if it worked in the worst-case offered thus far by history. I consider a 55 year old as a case study to show what savings rate will be needed to retire 10 years later, or how much longer one should work with a variety of other savings rates. Results are shown for a wide variety of situations. These findings can potentially serve as a reality check about the sustainability of one’s retirement plans.

How Do Management Fees Affect Retirement Wealth under Mexico's Personal Retirement Accounts System?

In 1997, Mexico transformed its pay-as-you-go social security system to a fully funded system with personal retirement accounts, including management fees. This article examines changes in retirement wealth resulting from this new system. It shows that management fees have drained a significant proportion of individuals' retirement wealth and have increased the number of persons claiming a government-subsidized minimum pension, particularly from the time the system was introduced in 1997 until adjustment to management fees in 2008. Since 2008, retirement wealth accumulation has been similar to that of the previous system. En 1997, México transformó su sistema de pensiones basado en cotizaciones individuales a uno de ahorro para el retiro que incluyen cuotas por la administración de las cuentas. El presente estudio examina los cambios en el monto de las pensiones como resultado de la introducción del nuevo sistema. Los resultados muestran que las cuotas de administración han drenado una proporción significativa del ahorro para el retiro de los individuos por lo que ha aumentado el número de personas que solicita la pensión mínima garantizada subsidiada por el gobierno desde que se introdujo el sistema en 1997 hasta que se hicieron ajustes en las cuotas de administración de los fondos de pensiones en 2008. A partir de 2008, la acumulación del ahorro para el retiro ha sido similar que la del sistema anterior.

What Will Happen to Retirement Income for 401(k) Participants After the Market Decline?

This paper uses administrative data from millions of 401(k) participants dating back to 1996 as well as several simulation models to determine 401(k) plans' susceptibility to several alleged limitations as well as its potential for significant retirement wealth accumulation for employees working for employers who have chosen to sponsor these plans. What will happen to 401(k) participants after the 2008 market decline will be largely determined by the extent to which the features of automatic enrollment, automatic escalation of contributions, and automatic investment are allowed to play out. Simulation results suggest that the first two features will significantly improve retirement wealth for the lowest-income quartiles going forward, and the third feature (primarily target-date funds) suggest that a large percentage of those on the verge of retirement would benefit significantly by a reduction of equity concentrations to a more age-appropriate level.

Assessing the Impact of Fees on Performance and Shortfall Risk in Target Date Investment Funds

Target-date investment funds are one of the fastest-growing segments in the mutual fund industry. Yet there exists only a very limited literature on their comparative risk-return characteristics. This article is the first to assess simultaneously the impact of differential fees on income accumulation and on the risk that the asset allocation inherent in target-date investment funds will generate insufficient retirement funds to furnish a minimum acceptable standard of living. The modeling framework described in this article provides a means to calculate the implied defined benefit savings rate and shortfall risk. The author finds that the opportunity cost of fees on retirement wealth accumulation is modest for aggressive target-date funds. However, for conservative funds the opportunity cost of fees can be substantial. This is a counterintuitive result. A simple rule of thumb for assessing the impact of fees on accumulated retirement wealth is also developed. The methodological framework, analysis, and results discussed in this article will help investors, plan sponsors, and policy makers better understand the risk-return characteristics of different target-date investment strategies. <b>TOPICS:</b>Performance measurement, risk management, retirement

Are All Americans Saving 'Optimally' for Retirement?

Many people fear that Americans are preparing poorly for retirement. But developing rigorous evidence on this issue is difficult. In this paper we briefly discuss evidence on the adequacy of retirement wealth accumulation. We conclude that existing descriptive evidence does not seem consistent with dire assessments of poor financial preparation. We then extend the straightforward, but computationally complex dynamic programming approach used in our earlier work to assess the adequacy of retirement wealth preparation of Americans born before 1954. We find only 4 percent of HRS households have net worth below their optimal targets in 2004, though this percentage is somewhat higher for more recent HRS cohorts. While our work is preliminary, we find little evidence that Americans born before 1954 have prepared poorly for retirement.

VERTEBRAL OSTEOMYELITIS COMPLICATING PNEUMOCOCCAL MENINGITIS

Target-date investment funds are one of the fastest-growing segments in the mutual fund industry. Yet there exists only a very limited literature on their comparative risk-return characteristics. This article is the first to assess simultaneously the impact of differential fees on income accumulation and on the risk that the asset allocation inherent in target-date investment funds will generate insufficient retirement funds to furnish a minimum acceptable standard of living. The modeling framework described in this article provides a means to calculate the implied defined benefit savings rate and shortfall risk. The author finds that the opportunity cost of fees on retirement wealth accumulation is modest for aggressive target-date funds. However, for conservative funds the opportunity cost of fees can be substantial. This is a counterintuitive result. A simple rule of thumb for assessing the impact of fees on accumulated retirement wealth is also developed. The methodological framework, analysis, and results discussed in this article will help investors, plan sponsors, and policy makers better understand the risk-return characteristics of different target-date investment strategies. <b>TOPICS:</b>Performance measurement, risk management, retirement

Lifetime Earnings, Social Security Benefits, and the Adequacy of Retirement Wealth Accumulation

This paper provides new evidence on the adequacy of household retirement saving. We depart from much previous research on the adequacy of saving in two key ways. First, our underlying simulation model of optimal wealth accumulation allows for precautionary saving against uncertain future earnings. Second, we employ data on lifetime earnings. Using data from the 1992 Health and Retirement Study, we find that households at the median of the empirical wealth-lifetime earnings distribution are saving as much or more as the underlying model suggests is optimal, and households at the high end of the wealth distribution are saving significantly more than the model indicates. But we also find significant undersaving among the lowest 25 percent of the population. We show that reductions in Social Security benefits could have significant deleterious effects on the adequacy of saving, especially among low-income households. We also show that, controlling for lifetime earnings, households with high current earnings tend to save far more adequately than other households.

Retirement Wealth Accumulation and Decumulation: New Developments and Outstanding Opportunities

Analysts have raised questions about current workers' ability and inclination to save enough for This issue of obvious policy interest given the current debate over reforming national retirement income programs. This paper explores the implications of recent research regarding retirement wealth accumulation and decumulation for this debate. Our goal is to identify problems and opportunities in the area of preparedness for retirement.

Living with defined contribution pensions: remaking responsibility for retirement

Preface 1. Defined Contribution Pensions: New Opportunities, New Risks -Olivia S. Mitchell, Sylvester J. Schieber 2. Pension Coverage Initiatives: Why Don't Workers Participate? -Richard P. Hinz, John A. Turner 3. Financial Illiteracy, Education, and Retirement Saving -B. Douglas Bernheim 4. Factors Affecting Participation Rates and Contribution Levels in 401(k) Plans -Robert L. Clark, Sylvester J. Schieber 5. Employee Decisions with Respect to 401(k) Plans -Andrea L. Kusko, James M. Poterba, David W. Wilcox 6. Implications of the Shift to Defined Contribution Plans for Retirement Wealth Accumulation -William G. Gale, Joseph M. Milano 7. Responses of Mutual Fund Investors to Adverse Market Disruptions -John D. Rea, Richard G. Marcis 8. Trends in Retirement Income Plan Administrative Expenses -Edwin C. Hustead 9. Emerging Problems of Fiduciary Liability -Brian T. Ortelere 10. The Changing Paradigm of 401(k) Plan Servicing -Ronald D. Hurt 11. The Importance of Variable Annuities in a Defined Contribution Pension System -P. Brett Hammond 12. Disparate Savings Propensities and National Retirement Policy -Richard A. Ippolito 13. The Future of the Defined Contribution Revolution -Sylvester J. Schieber, Richard Dunn, David L. Wray Contributors Index