The Retirement‐savings Puzzle Reviewed: The Role of Housing and Bequests

Abstract

The so‐called retirement‐savings puzzle is a phenomenon by which, contrary to what the standard life‐cycle model predicts, households do not run down their wealth significantly during retirement. In this review paper, we survey the literature on the retirement‐savings puzzle and we connect it with the literature on housing equity during retirement. To establish a link between these two streams of literature, we use as a framework the work of Nakajima and Telyukova (2013a, Home equity in retirement, UCSD Working Paper) and Nakajima and Telyukova (2017, Reverse mortgage loans: a quantitative analysis, Journal of Finance 72: 911–950), who find that home‐ownership interacts with factors that explain the retirement‐savings puzzle, notably with the bequest motive. We complement the results by Nakajima and Telyukova by relating them to the literature on altruistic bequests, strategic bequests and housing as a commitment device, all of which give further insights on the connection between home‐ownership and bequests. We complement our review of the literature with descriptive evidence using the Netherlands as a case study.

Home Equity in Retirement

“…() and Suari‐Andreu et al. () conduct comprehensive surveys of existing literature on the retirement saving puzzle, including models with housing. The latter uses this article's framework as a point of departure, and analyzes data from the Netherlands, to show that there is significant association between housing and bequest motives in accounting for the retirement saving puzzle, and that removing housing from consideration may significantly understate the role of bequests.…”

Design of comprehensive income products for retirement using utility functions

“…Specifying a ‘minimum acceptable outcome’ that the member needs to avoid may be appropriate in some situations. This treatment might be motivated by avoiding poverty (see Suari-Andreu et al, 2019), or risk capacity (see Klements, 2018) in the sense that there may be limited capacity to endure outcomes below some threshold. One method is to incorporate a consumption floor in the utility function (see Appendix 1), which has been applied in an Australian setting by Kingston and Thorp (2005), Ding (2014), Iskhakov et al (2015), Andréasson et al (2017) and Andréasson and Shevchenko (2017).…”

“…6 These elements can act as partial substitutes, as funds set aside might satisfy any of these purposes. Further, all three purposes can interact with homeownership (see Lockwood, 2018; Suari-Andreu et al, 2019). Appendix 1 presents a commonly used equation for utility from bequests and discusses implementation issues.…”

Home Equity in Retirement

“…De Nardi et al (2016b) and Suari-Andreu et al (2019) conduct comprehensive surveys of existing literature on the retirement saving puzzle, including models with housing. The latter uses this paper's framework as a point of departure, and analyzes data from the Netherlands, to show that there is significant association between housing and bequest motives in accounting for the retirement saving puzzle, and that removing housing from consideration may significantly understate the role of bequests.…”