In this article, we review evidence of retirement under-saving and potential solutions, as well as empirical evidence regarding investor reaction to negative market returns. We present new corroborating evidence from fund flows around the recent volatile market events in 2020 that indicates a rising loss aversion, just as asset levels become significant with investors approaching retirement. We surmise that recent trading activity implies an aggregate investor preference for target-date fund (TDF) portfolios within a 20-year time horizon of retirement, with a volatility profile that is potentially too conservative for requisite savings in later years, due to concomitant lower portfolio return potential combined with the aggregate under-saving problem. This mismatch in investor preferences is compounded by a reactionary tactical investor trading strategy that essentially buys high and sells low. We propose that the rising investor loss-aversion problem can be mitigated by including guaranteed retirement income products in the asset mix in a defined contribution qualified default investment alternative setting to provide for the desired downside risk protection against extreme events, or else by shifting investors from a TDF to a managed account (MA) setting in later years to accomplish the same goal, or by utilizing both approaches in tandem. Given the evidence of MA utilization in increasing aggregate savings rates, reducing portfolio risk levels and its potential to meaningfully address the serious measured return drag from investor return-chasing behavior, the potential benefits can outweigh the higher average fee burden for managed advice in many cases. The question then becomes at what age do the benefits outweigh the potential costs, on average. Based upon the recent empirical evidence of TDF flow data from 2020 and data on average account balances, we propose that the appropriate age for automatic transition to managed accounts could be as early as 40.
{"title":"The Appropriate Age for Transition to Managed Accounts in a Qualified Default Framework: It Might Be Earlier than You Think","authors":"Keith Gustafson, Christopher R. O'Neill","doi":"10.3905/jor.2022.1.125","DOIUrl":"https://doi.org/10.3905/jor.2022.1.125","url":null,"abstract":"In this article, we review evidence of retirement under-saving and potential solutions, as well as empirical evidence regarding investor reaction to negative market returns. We present new corroborating evidence from fund flows around the recent volatile market events in 2020 that indicates a rising loss aversion, just as asset levels become significant with investors approaching retirement. We surmise that recent trading activity implies an aggregate investor preference for target-date fund (TDF) portfolios within a 20-year time horizon of retirement, with a volatility profile that is potentially too conservative for requisite savings in later years, due to concomitant lower portfolio return potential combined with the aggregate under-saving problem. This mismatch in investor preferences is compounded by a reactionary tactical investor trading strategy that essentially buys high and sells low. We propose that the rising investor loss-aversion problem can be mitigated by including guaranteed retirement income products in the asset mix in a defined contribution qualified default investment alternative setting to provide for the desired downside risk protection against extreme events, or else by shifting investors from a TDF to a managed account (MA) setting in later years to accomplish the same goal, or by utilizing both approaches in tandem. Given the evidence of MA utilization in increasing aggregate savings rates, reducing portfolio risk levels and its potential to meaningfully address the serious measured return drag from investor return-chasing behavior, the potential benefits can outweigh the higher average fee burden for managed advice in many cases. The question then becomes at what age do the benefits outweigh the potential costs, on average. Based upon the recent empirical evidence of TDF flow data from 2020 and data on average account balances, we propose that the appropriate age for automatic transition to managed accounts could be as early as 40.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"21 - 32"},"PeriodicalIF":0.0,"publicationDate":"2022-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42295903","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article examines individuals’ balance sheets, financial situations, and retirement planning steps to understand the barriers to annuity ownership and identifies the financial and sociodemographic factors that contribute to annuity ownership. Using data from the 2018 National Financial Capability Study, we conduct an empirical analysis of individuals in the retirement-planning phase of the life cycle (ages 40–61) and individuals of retirement age (age 62 and over). We find that debt obligations, lack of access to liquidity, and low financial literacy are all likely barriers to annuity ownership; the annuity owners in our sample are more likely than the non-owners to have access to liquidity and to report higher levels of financial satisfaction. Results indicate that access to liquidity and to professional investment management are positively associated with annuity ownership. Furthermore, financial literacy could lead to increased take-up rates through improved access to liquidity and ultimately enhanced retirement outcomes.
{"title":"Debt, Illiquidity, and Financial Illiteracy as Barriers to Annuity Ownership","authors":"Hallie Davis, Andrea Hasler, A. Lusardi","doi":"10.3905/jor.2022.1.124","DOIUrl":"https://doi.org/10.3905/jor.2022.1.124","url":null,"abstract":"This article examines individuals’ balance sheets, financial situations, and retirement planning steps to understand the barriers to annuity ownership and identifies the financial and sociodemographic factors that contribute to annuity ownership. Using data from the 2018 National Financial Capability Study, we conduct an empirical analysis of individuals in the retirement-planning phase of the life cycle (ages 40–61) and individuals of retirement age (age 62 and over). We find that debt obligations, lack of access to liquidity, and low financial literacy are all likely barriers to annuity ownership; the annuity owners in our sample are more likely than the non-owners to have access to liquidity and to report higher levels of financial satisfaction. Results indicate that access to liquidity and to professional investment management are positively associated with annuity ownership. Furthermore, financial literacy could lead to increased take-up rates through improved access to liquidity and ultimately enhanced retirement outcomes.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"33 - 53"},"PeriodicalIF":0.0,"publicationDate":"2022-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46340927","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article studies population preferences and assessments of retirement systems in Chile. I use a unique survey that allowed me to construct individuals’ evaluations of different pillars within retirement systems (e.g., individual, solidary, and state-funded pillars), and their evaluations of current system performance and private pension fund administrators using attitudinal responses. The results imply that social well-being is an important consideration among high-income, highly educated individuals. College-educated individuals were significantly (6.8%) more likely to agree with a solidary pillar funded by contributors, while 1% increases in income significantly increased the likelihood of preferring a system with a solidary component (by 0.5%). This group was also more demanding with regard to the performance of the system and pension fund administrators. The findings also demonstrate that gender is a crucial determinant: men were consistently more likely than women to agree with the three-pillar model and social investments. This result suggests that women should be a specific target in communication campaigns when reforms are being designed and implemented.
{"title":"The Characterization of Population Preferences and Assessments of Retirement Systems: Evidence from Chile","authors":"Marcela Parada‐Contzen","doi":"10.3905/jor.2022.1.121","DOIUrl":"https://doi.org/10.3905/jor.2022.1.121","url":null,"abstract":"This article studies population preferences and assessments of retirement systems in Chile. I use a unique survey that allowed me to construct individuals’ evaluations of different pillars within retirement systems (e.g., individual, solidary, and state-funded pillars), and their evaluations of current system performance and private pension fund administrators using attitudinal responses. The results imply that social well-being is an important consideration among high-income, highly educated individuals. College-educated individuals were significantly (6.8%) more likely to agree with a solidary pillar funded by contributors, while 1% increases in income significantly increased the likelihood of preferring a system with a solidary component (by 0.5%). This group was also more demanding with regard to the performance of the system and pension fund administrators. The findings also demonstrate that gender is a crucial determinant: men were consistently more likely than women to agree with the three-pillar model and social investments. This result suggests that women should be a specific target in communication campaigns when reforms are being designed and implemented.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"7 - 32"},"PeriodicalIF":0.0,"publicationDate":"2022-10-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47648451","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"guest column How Would a Universal Auto IRA with Emergency Savings Impact Overall Wealth and Liquid Asset Accumulation?","authors":"Warren Cormier, David C. John, James Watt","doi":"10.3905/jor.2022.1.120","DOIUrl":"https://doi.org/10.3905/jor.2022.1.120","url":null,"abstract":"","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"89 - 91"},"PeriodicalIF":0.0,"publicationDate":"2022-09-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47893988","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jason S. Scott, J. Shoven, S. Slavov, John G. Watson
Retirement policy is often predicated on the belief that more saving is always better, at least at the margin. This belief is used to justify the increasingly widespread practice of automatically enrolling workers in employer-sponsored defined contribution plans. However, the conclusion that individuals do not save optimally for retirement requires a benchmark for optimal behavior. A reasonable benchmark that is often used in the academic literature is the life-cycle model, in which rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living. We argue that, under realistic assumptions, the life-cycle model implies that most young people should not save for retirement. First, high-income workers tend to experience wage growth over their careers. For these workers, maintaining as steady a standard of living as possible therefore requires spending all income while young and only starting to save for retirement during middle age. Second, low-income workers, whose wage profiles tend to be flatter, receive high Social Security replacement rates, making optimal saving rates very low. Finally, for all workers, low real interest rates make a front-loaded lifetime spending profile optimal. We show that the welfare costs of automatically enrolling younger workers in defined contribution plans—if they are passive savers who do not opt out immediately—can be substantial, even with employer matching.
{"title":"The Life-Cycle Model Implies that Most Young People Should Not Save for Retirement","authors":"Jason S. Scott, J. Shoven, S. Slavov, John G. Watson","doi":"10.3905/jor.2022.1.119","DOIUrl":"https://doi.org/10.3905/jor.2022.1.119","url":null,"abstract":"Retirement policy is often predicated on the belief that more saving is always better, at least at the margin. This belief is used to justify the increasingly widespread practice of automatically enrolling workers in employer-sponsored defined contribution plans. However, the conclusion that individuals do not save optimally for retirement requires a benchmark for optimal behavior. A reasonable benchmark that is often used in the academic literature is the life-cycle model, in which rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living. We argue that, under realistic assumptions, the life-cycle model implies that most young people should not save for retirement. First, high-income workers tend to experience wage growth over their careers. For these workers, maintaining as steady a standard of living as possible therefore requires spending all income while young and only starting to save for retirement during middle age. Second, low-income workers, whose wage profiles tend to be flatter, receive high Social Security replacement rates, making optimal saving rates very low. Finally, for all workers, low real interest rates make a front-loaded lifetime spending profile optimal. We show that the welfare costs of automatically enrolling younger workers in defined contribution plans—if they are passive savers who do not opt out immediately—can be substantial, even with employer matching.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"47 - 70"},"PeriodicalIF":0.0,"publicationDate":"2022-08-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46702117","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, we integrate investment decisions in the post-retirement period with the inclusion of a deferred annuity (DA) to provide a lifetime decumulation solution. We use the perfect withdrawal rate (PWR) as a tool to make recommendations on withdrawal rates and asset allocations. We illustrate how cheap it is to use a DA to deal with longevity risk. Moreover, if individuals want to maximize median PWR, they should allocate almost 100% in stocks. If they want to maximize minimum PWR, they should allocate 40%–60% in stocks. A substantial stocks component should therefore be maintained throughout the retirement period as a new “normal” asset allocation.
{"title":"Adaptive Retirement Planning, Sustainable Withdrawals, and Deferred Annuities","authors":"An-ning Chen, S. Haberman, Stephen Thomas","doi":"10.3905/jor.2022.1.118","DOIUrl":"https://doi.org/10.3905/jor.2022.1.118","url":null,"abstract":"In this article, we integrate investment decisions in the post-retirement period with the inclusion of a deferred annuity (DA) to provide a lifetime decumulation solution. We use the perfect withdrawal rate (PWR) as a tool to make recommendations on withdrawal rates and asset allocations. We illustrate how cheap it is to use a DA to deal with longevity risk. Moreover, if individuals want to maximize median PWR, they should allocate almost 100% in stocks. If they want to maximize minimum PWR, they should allocate 40%–60% in stocks. A substantial stocks component should therefore be maintained throughout the retirement period as a new “normal” asset allocation.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"96 - 119"},"PeriodicalIF":0.0,"publicationDate":"2022-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41891114","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"guest column Retirees in Profile: What We Can Learn from Four Distinct Spending Segments","authors":"Warren Cormier, P. Hess, Dominika Türkcan","doi":"10.3905/jor.2022.1.116","DOIUrl":"https://doi.org/10.3905/jor.2022.1.116","url":null,"abstract":"","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"84 - 87"},"PeriodicalIF":0.0,"publicationDate":"2022-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44673467","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Robo advisors provide financial advice and manage investment portfolios, using online software. However, they often do not give advice concerning the decumulation phase of retirement planning. Tontines are financial products that provide a stream of income for life in retirement and serve as an alternative to annuities. They are an old product that fell out of favor but is making a comeback. They differ from annuities because they are not guaranteed and, therefore, incur lower costs. The benefits they provide vary over time depending on the mortality experience of the members and the financial market experience of the investments. This article proposes a combination of these two innovative products in the form of a robo tontine—that is, a tontine provided by robo advisors. We argue that robo advisors would be well suited to provide tontines for both supply and demand reasons. They are skilled in developing and managing financial products, and they have clients who will need help with the paydown phase of their retirement investments.
{"title":"Robo Tontines","authors":"Richard K. Fullmer, J. Turner","doi":"10.3905/jor.2022.1.115","DOIUrl":"https://doi.org/10.3905/jor.2022.1.115","url":null,"abstract":"Robo advisors provide financial advice and manage investment portfolios, using online software. However, they often do not give advice concerning the decumulation phase of retirement planning. Tontines are financial products that provide a stream of income for life in retirement and serve as an alternative to annuities. They are an old product that fell out of favor but is making a comeback. They differ from annuities because they are not guaranteed and, therefore, incur lower costs. The benefits they provide vary over time depending on the mortality experience of the members and the financial market experience of the investments. This article proposes a combination of these two innovative products in the form of a robo tontine—that is, a tontine provided by robo advisors. We argue that robo advisors would be well suited to provide tontines for both supply and demand reasons. They are skilled in developing and managing financial products, and they have clients who will need help with the paydown phase of their retirement investments.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"63 - 73"},"PeriodicalIF":0.0,"publicationDate":"2022-06-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43017834","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The transition to an older society, currently underway, should have a significant effect on investment returns. The size of the capital-using working-age population is no longer growing, which lowers the demand for savings. In addition, as the older share of the population rises, so will the supply of savings. Life-cycle models assume that the elderly will draw down the bulk of their savings in retirement. However, empirical studies show that well-to-do elderly, who own the bulk of the wealth of that demographic, do not take such drawdowns. Thus, as more boomers retire, the supply of savings will steadily rise, putting downward pressure on interest and corporate earnings rates. Capital gains boost investment returns, but such gains are one-time affairs; they do not continue forever. Moreover, should the ongoing demographic transition push the Federal Reserve funds rate (needed to maintain full employment) below zero, the result would be a chronically sluggish economy.
{"title":"The Demographic Transition and Investment Returns","authors":"S. Sass","doi":"10.3905/jor.2022.1.114","DOIUrl":"https://doi.org/10.3905/jor.2022.1.114","url":null,"abstract":"The transition to an older society, currently underway, should have a significant effect on investment returns. The size of the capital-using working-age population is no longer growing, which lowers the demand for savings. In addition, as the older share of the population rises, so will the supply of savings. Life-cycle models assume that the elderly will draw down the bulk of their savings in retirement. However, empirical studies show that well-to-do elderly, who own the bulk of the wealth of that demographic, do not take such drawdowns. Thus, as more boomers retire, the supply of savings will steadily rise, putting downward pressure on interest and corporate earnings rates. Capital gains boost investment returns, but such gains are one-time affairs; they do not continue forever. Moreover, should the ongoing demographic transition push the Federal Reserve funds rate (needed to maintain full employment) below zero, the result would be a chronically sluggish economy.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"1 4","pages":"74 - 83"},"PeriodicalIF":0.0,"publicationDate":"2022-06-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41256480","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
京公网安备 11010802042870号
京ICP备2023020795号-1
扫码关注我们
求助内容：
应助结果提醒方式：