Retirement Wealth Research Articles

Optimal allocation for stock market-excluded retirees: Effects of interest rates, longevity risk, and upfront fees

This paper studies the decision-making dynamics of stock market-excluded retirees, focusing on the optimal allocation of retirement wealth among consumption, risk-free assets, and single premium immediate annuities. The analysis centers on two pivotal factors: insurer interest rates and longevity risk. The study introduces new dimensions by highlighting the modeled financial environment’s optimal investment–consumption-annuitization profiles under different market scenarios. Additionally, insights on the low demand for life annuities are offered, attributing a significant part to the impact of upfront fees. Employing a life-cycle consumption framework, the paper advocates adopting a commission-free model, enabling registered investment advisors to market annuities with periodic assets under management fees to revitalize annuity demand and bolster retirement security.

Wealth, Consumption, and Savings Patterns in Retirement: A Challenge to the Life-Cycle Hypothesis

This paper investigates the wealth, consumption, and savings behavior of elderly individuals through the lens of the life-cycle hypothesis. Using data from Survey of Health, Ageing and Retirement, we employ Student's t-test to test differences between pre-retirement and retirement age groups. The findings shed light on the extent to which elderly individuals adhere to the life-cycle hypothesis and provide insights into the economic behavior of this demographic group. Our findings align with previous studies indicating that the life-cycle theory inadequately captures the dynamics of wealth, consumption, and savings during retirement age. According to our results, there is a consistent decrease in all examined variables with advancing age, with the lowest yet non-zero values observed among the oldest individuals.

Navigating risk: Impact of overconfidence in financial literacy on retirement wealth reserves

This study examined the impact of overconfidence in financial literacy on risky asset investments within retirement wealth reserves. We used data of 36,268 respondents of the “China Aging Finance Survey” (2020–2022). The findings reveal that overconfidence significantly drives households toward riskier investments, and the conclusions were reinforced through robustness checks. Furthermore, the effect was moderated by pension replacement rate satisfaction, willingness to pay for financial advice, and risk preferences. Heterogeneity analysis indicates that male respondents and less educated respondents were significantly affected by overconfidence. Moreover, respondents with basic pension insurance were likelier to opt for risky assets.

Do Tax Deferred Accounts Improve Lifecycle Savings? Experimental Evidence

Abstract In an individual decision-making experiment, we investigate the impact of Tax Deferred Accounts (TDAs). We design six treatments to study various channels through which TDAs may affect decisions. Across both student and Mturk samples, we consistently find that TDAs significantly increase retirement wealth compared to environments with only one non-tax advantaged, liquid saving account. This increase is primarily explained by the requirement of making retirement savings decisions precede consumption decisions. Educating participants by providing a tax calculator has minimal effects. Our results highlight the effectiveness of TDAs in enhancing retirement preparedness and the significance of the order of consumption/savings decisions.

Retirement wealth, earnings risks, and intergenerational links

AbstractThis paper investigates the accumulation and distribution of retirement wealth in a dynastic model with earnings risks, longevity uncertainties, and borrowing constraints. It resolves the wealth indeterminacy problem across generations in dynastic families by introducing a transaction cost for intergenerational transfers. It captures the pattern of inter vivos transfers, the relationship between wealth and earnings, and wealth inequality in the US data. Social security lowers precautionary savings by redistributing income from families with high earnings or short‐lived parents to others, thus reducing investment, the growth rate in income per capita, inequality in retirees' consumption, and the wealth‐earnings correlation.

No Rest for the Weary: Measuring the Changing Distribution of Retirement Wealth in the United States

ABSTRACT Since 1992 wealth for the bottom 90 percent of households nearing retirement has fallen. The only source of wealth helping the bottom 90 percent is Social Security. Despite pro savings policies and generous tax breaks for savings, the share of the bottom 50 percent having any retirement account didn’t change in 20 years — 46 percent in 1992 and 47 percent in 2016. Even the middle class suffered; the share of the next 40 percent with retirement savings fell from 85 percent in 1992 to a low of 71 percent in 2016. Housing ownership increased a bit for the bottom 50 percent but fell among the middle class and upper middle class. Home equity for the working and middle class fell. Using SCF and HRS data over 20 years, we find the bulk of working-class wealth is government social insurance. Economists should not exclude social insurance from wealth calculations. We find social insurance is the most important source of wealth for most families. Government policies and institutions have failed wealth building for most American households with workers.

Gender and Risk-Taking in the Building of U.S. Retirement Wealth

AbstractThe growing weight being placed on self-directed retirement accounts within the United States retirement income policy framework, and the time inconsistency challenge of individuals, particularly women, tending to under-invest in retirement savings accounts motivated the current work. Using data from the United States Federal Reserve Board’s Survey of Consumer Finances, for a period spanning from 1989 to 2019, 11 cross-sections of data, the paper investigated the role of gender in United States retirement risk-taking investment strategies of single (never married) individuals. The analysis documented increasing trends in the risk-taking of both single women and single men but recorded differences in the risk-taking profiles of the two groups, with single men taking more risk than single women in their retirement wealth building in most cross-sections, with the gender risk-taking gap dropping, nonetheless, algebraically in magnitude from 1989 to 2019.

Age when first employed and retirement wealth of baby boomers

This study examines how age when first employed is related to retirement savings in later years. Using data from the Health and Retirement Study, we investigate two specific questions: Has age when first employed affected the retirement wealth of baby boomers? If so, to what extent? The results show that age when first employed is negatively associated with accumulated retirement wealth in later years. For college graduates (high school graduates), delaying the start of employment cost $35,103 ($7,534) per year in retirement savings after controlling for demographic characteristics, number of working years, and occupation types.

Marital status, health, and retirement wealth for middle aged and older women

We investigate the different impacts of health problems on wealth among unmarried and married women in their later years. We advance the literature by using a new health measure of a 22 year sequence of chronic diseases. Using data from 2,476 women age 50 or older from the 1992–2014 Health and Retirement Study, we find that unmarried women have more complicated and costly health sequences compared with married women, including multi-morbidity or co-morbidity. Over the 22 year period, retirement wealth for unmarried women with costly health sequences is reduced by approximately $3,600 to $5,400 annually.

Analytic approach for models of optimal retirement with disability risk

Models of optimal retirement should reflect market incompleteness in reality caused by disability risk. In this paper, we develop an analytic approach for optimal retirement models with disability risk. More precisely, we provide an analytically tractable characterization of total wealth that is the sum of financial wealth and the present value of future income. We then provide analytic properties of the retirement wealth threshold. Finally, we derive the analytical optimal consumption and portfolio choice with retirement and disability risk.

Mortality differentials, the racial and ethnic retirement wealth gap, and the COVID-19 Pandemic

Using the Survey of Consumer Finances, I find that the Black/white gap in standard net worth widened from 1989 to 2019 but narrowed between Hispanics and (non-Hispanic) whites. When the definition of wealth is expanded to incorporate Social Security and defined benefit pension wealth (both the discounted sum of future benefits) to create augmented wealth, the wealth gap is sharply reduced, especially for median wealth. The Black/white and Hispanic/white disparity in Social Security wealth lessened considerably over 1989–2019. In contrast, the Black/white ratio of mean augmented wealth showed no change, though the ratio of median augmented wealth progressed. The Hispanic/white ratio of both mean and median augmented wealth advanced as well. The COVID-19 Pandemic struck in 2020 and hit the minority community much harder than whites in terms of mortality rates. Besides claiming over a million lives overall, it lopped off 4.7 percent of Social Security wealth among whites, 11.5 percent among Blacks, and 13.1 percent among Hispanics. As a result, while mean augmented wealth dipped only 1.2 percent among whites, it fell 6.7 percent among Black households and 7.3 percent among Hispanics. The effect was even stronger on median values – declines of a 2.6, 9.3 and 12.1 percent, respectively.

Impact of inflation severity on retirement savings: A simulation analysis of projected accumulation and de-accumulation

Statistics have shown that by the age of 60, Malaysian life expectancy for males and females is expected to be 17.5 and 20.1 years, respectively. Thus, if not properly addressed by the authorities, the ageing population would contribute to a serious problem for the public by having an inadequacy of retirement wealth to sustain their lives. Considering all of these issues, the present study seeks to comprehensively examine the extent to which inflation adversely affects retirement savings. This investigation holds the potential to yield valuable insights into the accumulation of retirement wealth, thereby addressing the issue of insufficient retirement income, particularly among members of the Employees Provident Fund. Using a mathematical iteration formulation approach, the accumulation and de-accumulation of retirement wealth subject to inflation are formulated to examine the severe impact of this economic factor. Ironically, the disruptive effect of inflation on retirement savings is not severe. It is the power of compounding returns generated by dividend profits that absorbs the real impact. Despite the fact that this is a useful insight, people must plan well for their retirement savings to avoid having them eaten up by inflation. The results showed that inflation disruptions of varying degrees can negatively impact retirement funds. In order to effectively mitigate the potentially detrimental impact of inflation on retirement savings, it becomes imperative to adopt a strategic approach that encompasses various measures, like the exploration of investment opportunities that possess the potential to generate returns surpassing the prevailing inflation rate.

Retirement Wealth Adequacy Estimation Based on Income Group Classification: A Case Study in Malaysia

The inadequacy of retirement wealth can significantly impact a country’s social support system. The increase of the size of the elderly population in line with the constant growth of life expectancy among Malaysians has triggered a question, are there enough resources to cover needs in retirement years? The main objective of this study is to estimate the retirement income adequacy of future retirees under a defined contribution (DC) plan, which is the Employee Provident Fund (EPF). The projection of retirement income adequacy uses cross-sectional data from the Malaysian Household Income Survey (HIS) 2014, based on 14,169 sample households. The households are categorized according to three different income groups, including Top 20% (T20), Middle 40% (M40) and Bottom 40% (B 40). In addition, this research also investigates the demographic and socio-economic determinants of retirement wealth adequacy using OLS and logistic regression. The result shows that 26% of households in the sample have inadequate retirement income, especially households in the B 40 group.

Spending trajectories after age 65 variation by initial wealth

There has been extensive research on the importance of saving for retirement and on tools to support the accumulation of retirement wealth. Much less attention has been paid to the decumulation phase, that is, the spending down of wealth following retirement. Understanding the decumulation phase requires information about the spending patterns of older households and how those patterns evolve with age. This study uses comprehensive longitudinal data on total household spending from a survey that is representative of the older U.S. population to estimate the trajectories of spending after age 65. Based on data spanning the period 2005–2019, real spending declined for both single and coupled households after age 65 at annual rates of about 1.7 percent and 2.4 percent, respectively. Stratification by wealth holdings observed at or closely following age 65 showed sizeable variation in spending levels by wealth quartile, but little variation in rates of change in spending. The fact that spending declines broadly, including among those in the highest wealth quartile, suggests that the decline may not be related to economic position. This view is supported by an analysis of budget shares which show increases with age in the budget share for gifts and donations which suggests that economic position on average does not deteriorate with age, even as spending declines.

The effects of pre-/post-retirement borrowing constraints on optimal consumption, investment, and retirement

In this paper, we explore an optimization problem in which a working agent with an option to retire wants to maximize her expected lifetime utility. The agent receives labor (or annuity) income before/after retirement and experiences dis-utility due to labor. Additionally, the agent can partially borrow against her future income before/after retirement. We demonstrate that when pre-retirement borrowing constraints are strict, the agent retires early, while strong post-retirement borrowing constraints result in a late retirement. Our numerical results reveal that the retirement threshold level changes with varying interest rates, with an increase in interest rates leading to a general decrease in the retirement threshold level. However, in certain cases with borrowing constraints, the declining effects of pre-/post-retirement discounted income strongly influence the retirement decision as the interest rate increases. Additionally, our findings indicate that the impact of the volatility of the risky asset and the interest rate on the retirement wealth level varies. Specifically, at low interest rates, higher volatility is associated with an increased retirement wealth level, while at high interest rates, lower volatility results in a marginal increase in the retirement wealth level. These findings suggest a diminishing influence of volatility on the retirement wealth level as interest rates rise.

Would Baby Bonds Reduce Racial Retirement Wealth Inequality?

Would Baby Bonds Reduce Racial Retirement Wealth Inequality?

Enhancing Retirement Wealth and Reducing Retiree Inequality: Emergency Savings Accounts and Other Policy Options

Enhancing Retirement Wealth and Reducing Retiree Inequality: Emergency Savings Accounts and Other Policy Options

Mortality Differentials, the Racial and Ethnic Retirement Wealth Gap, and the Great Pandemic

Mortality Differentials, the Racial and Ethnic Retirement Wealth Gap, and the Great Pandemic

Tax Policy to Reduce Racial Retirement Wealth Inequality

Tax Policy to Reduce Racial Retirement Wealth Inequality

Default Behavior and Risk Aversion in Defined Contribution Retirement Systems: Evidence from Chile

Abstract This paper studies the design of investment policies in defined contribution retirement systems. I estimate a dynamic system of correlated equations of lifecycle behavior that fully models the individual’s decision-making process to account for estimation biases. In the model, individuals make decisions that impact their retirement wealth within the Chilean retirement system. Behaviors are allowed to depend on risk preferences while modeling other sources of nonlinear unobserved heterogeneity. The estimated decision-making process allows us to simulate the effects of policy experiments (ex ante), such as defaulting individuals into riskier investment strategies or increasing contribution rates. The results indicate that individuals react by opting into safer plans despite their observed inertia and that increases in mandatory contributions generate little crowding out of other behaviors. Not modeling risk aversion and its endogeneity with behavior leads to substantial simulation biases.