The Composition and Drawdown of Wealth in Retirement

Poterba, James M.; Venti, Steven F.; Wise, David A.

doi:10.1257/jep.25.4.95

Cited by 170 publications

(110 citation statements)

References 39 publications

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“…It has therefore been a puzzle that life annuities have not been more popular: research on choices among pre-retirees able to choose between annuities and lump sum payouts for their retirement savings finds that often less than 10 percent choose the annuity (Poterba, Venti, and Wise 2011;Johnson et al 2004).…”

Section: The Role Of Annuities In Consumer Decumulationmentioning

confidence: 99%

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Shu

Zeithammer

Payne

2016

Journal of Marketing Research

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Decisions about life annuities are an important part of consumer decumulation of retirement assets, yet are relatively underexplored by marketing researchers studying consumer financial decision-making. In this paper we propose and estimate a model of individual preferences for life annuity attributes using a choice-based stated-preference survey. Annuities are presented in terms of consumer-relevant attributes such as monthly income, yearly adjustments, period certain guarantees, and company financial strength. We find that attributes directly influence preferences beyond their impact on the annuity's expected present value. The strength of the direct influence depends on how annuities are described: when represented only via basic attributes, consumers undervalue inflation protection and preferences are not monotonically increasing in duration of period certain guarantees. When descriptions are enriched with cumulative payment information, consumers no longer undervalue inflation protection, but nonlinear preferences for period certain options remain. We find that among annuities with the same expected payout but different annual increases and period certain guarantees, the proportion of consumers choosing the annuity over self-management can vary by more than a factor of two. With baby boomers now retiring at the rate of almost 10,000 per day, the issue of decumulation of retirement assets is increasingly important to economists, public policy experts, and the financial services industry. It should also be of interest to researchers in marketing because consumers in the market for decumulation products, such as annuities, face a choice problem with large financial stakes, limited learning opportunities, difficult consumption tradeoffs, multiple sources of uncertainty, issues of trust and branding, and long time periods. All of these aspects of the decumulation problem are topics on which marketing research can offer important insights. This paper studies the structure of consumer preferences for life annuities -an important class of decumulation products. We employ a choice-based conjoint analysis to measure consumer preferences and relate them to the underlying financial value of the products. KeywordsAnnuities, as well as many other financial products, provide a unique setting for choice modeling because most annuity attributes have calculable expected present value that can be directly compared to consumers' revealed utilities. Consequently, we are able to see whether an attribute influences demand only through its contribution to the normative net present financial value of the annuity product ("NPV"), or whether attribute values have psychological worth "beyond NPV." We find that a typical consumer choosing from a set of annuities does not merely maximize the expected financial value, but also reacts to several product attributes directlyexpressing preferences beyond the effect of attributes on the financial value. For example, most consumers overvalue medium (10-20 years) levels of period-certa...

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Section: The Role Of Annuities In Consumer Decumulationmentioning

confidence: 99%

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Shu

Zeithammer

Payne

2016

Journal of Marketing Research

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“…There is little evidence that households reduce the level of relatively risky assets, such as shares, as they age. Owner-occupied housing often represents the largest single asset held by households, and Poterba, Venti and Wise (2011) argue that many households in the US appear to treat housing equity as 'precautionary savings'. That is, they tend to draw those assets down or consume them only when they experience a shock, such as the death of a spouse or a period of substantial medical outlays.…”

Section: Portfolio Choice Over the Life-cycle: Empirical Evidencementioning

confidence: 99%

Asset portfolio retirement decisions: the role of the tax and transfer system

Whelan¹,

Atalay²,

Dynan³

2018

AHURI Final Report

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AHURIAHURI is a national independent research network with an expert not-for-profit research management company, AHURI Limited, at its centre.AHURI's mission is to deliver high quality research that influences policy development and practice change to improve the housing and urban environments of all Australians.Using high quality, independent evidence and through active, managed engagement, AHURI works to inform the policies and practices of governments and the housing and urban development industries, and stimulate debate in the broader Australian community.AHURI undertakes evidence-based policy development on a range of priority policy topics that are of interest to our audience groups, including housing and labour markets, urban growth and renewal, planning and infrastructure development, housing supply and affordability, homelessness, economic productivity, and social cohesion and wellbeing. AcknowledgementsThis material was produced with funding from the Australian Government and state and territory governments. AHURI Limited gratefully acknowledges the financial and other support it has received from these governments, without which this work would not have been possible. AHURI Limited also gratefully acknowledges the contributions, both financial and in-kind, of its university research partners who have helped make the completion of this material possible. DisclaimerThe opinions in this report reflect the views of the authors and do not necessarily reflect those of AHURI Limited, its Board, its funding organisations or Inquiry panel members. No responsibility is accepted by AHURI Limited, its Board or funders for the accuracy or omission of any statement, opinion, advice or information in this publication. Lachlan Dynan's contributions were made during his time as an Honours student at the University of Sydney, and not during his subsequent employment at the Reserve Bank of Australia. As such, the views represented here are unrelated to the Reserve Bank of Australia.This report uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The HILDA project was initiated and is funded by the Australian Government Department of Social Services (DSS) and is managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). The findings and views reported in this report, however, are those of the authors and should not be attributed to either DSS or the Melbourne Institute. AHURI journalAHURI Final Report journal series is a refereed series presenting the results of original research to a diverse readership of policy-makers, researchers and practitioners. Peer review statementAn objective assessment of reports published in the AHURI journal series by carefully selected experts in the field ensures that material published is of the highest quality. The AHURI journal series employs a double-blind peer review of the full report, where anonymity is strictly observed between authors and referees. Contents List of tables vii List of figures viiiAc...

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“…Davidoff (2009) proposed that high levels of housing equity could explain the low level of voluntary annuitization since, like annuities, homeownership serves as a protection against longevity risk since its equity can be drawn on in old age as well as in the event of illness, thereby also protecting against health shocks (Venti and Wise 2004;Poterba et al 2011b).…”

Section: Annuitizationmentioning

confidence: 99%

“…Since divorce or the need for specialized medical care could require that the retiree vacate his or her home, Skinner (2006) suggested that owning a home that could be sold is a good hedge against such risks, although Redfoot noted that "planning to sell the house at a time of future need is quite risky in a world when home values go up and down and where it can take a long time to sell a house" (Siegel 2011). Empirical evidence suggests that retirees do, in fact, treat housing equity as precautionary savings to finance large, unplanned expenses such as health needs (Venti and Wise 2004;Poterba et al 2011b). Pang and Warshawsky (2010) suggested that an annuity could substitute for long-term care insurance since its stable income stream would help to cover the ongoing costs of care, particularly during advanced ages when chronic health conditions are more likely and wealth would have otherwise become depleted.…”

Section: (1) Individual and Employment-related Sourcesmentioning

confidence: 99%

Research and Reality: A Literature Review on Drawing Down Retirement Financial Savings

MacDonald

Jones

Morrison

et al. 2013

North American Actuarial Journal

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How do, could, and should retirees draw down their financial savings? This article reviews over 100 papers on this topic from the perspective of individuals, families, governments, and financial institutions. Three significant conceptual/methodological weaknesses in the existing literature are identified: (1) analysts have examined a limited range of self-managed drawdown strategies; (2) nearly all have ignored home ownership, pensions, debt, and government taxes and transfers when quantitatively evaluating alternative drawdown strategies; and (3) there is a well-acknowledged gap between the behavior implied by economic models and that of real-life individuals, particularly when it comes to voluntary annuitization. Expanding the set of drawdown strategies evaluated (e.g., including larger payouts when life expectancy is reduced after the onset of a significant health condition, or using savings as bridge income to delay the take-up of Social Security payments), refining the income concept used, and more exact modeling of the trade-offs underlying individual decision-making will likely increase the appeal of self-managed drawdown strategies and help resolve the "annuity puzzle" that has long dominated this line of research. It may also lead to advice and financial products that will better meet the needs of retirees.

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The Composition and Drawdown of Wealth in Retirement

Cited by 170 publications

References 39 publications

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Asset portfolio retirement decisions: the role of the tax and transfer system

Research and Reality: A Literature Review on Drawing Down Retirement Financial Savings

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