Wealth Accumulation and the Propensity to Plan

Why do similar households end up with very different levels of wealth? We show that differences in the attitudes and skills with which they approach financial planning are a significant factor. We use new and unique survey data to assess these differences and to measure each household's 'propensity to plan.' We show that those with a higher such propensity spend more time developing financial plans, and that this shift in planning effort is associated with increased wealth. The propensity to plan is uncorrelated with survey measures of the discount factor and the bequest motive, raising a question as to why it is associated with wealth accumulation. Part of the answer lies in the very strong relationship we uncover between the propensity to plan and how carefully households monitor their spending. It appears that this detailed monitoring activity helps households to save more and to accumulate more wealth.

The Absent-Minded Consumer

We present evidence that many households have only a vague notion of what they are spending on various consumption items. We then develop a life-cycle model that captures this absent-mindedness'. The model generates precautionary spending, whereby absent-minded agents tend to consume more than attentive ones. The model also predicts fluctuations over time in the level of attention, and thereby sheds new light on the sharp reduction in consumption both at retirement, and in cyclical downturns. Finally, we find patterns of attention in the data that are consistent with those predicted by the model.

Retirement Consumption: Insights from a Survey

Prior research has established that consumption falls significantly at retirement. What is not known is the extent to which this fall is anticipated during the working years. Do working households expect such a large fall in consumption upon retirement, or are they taken by surprise? Using data from a new survey, we show that many working households do expect a considerable fall in consumption when they retire. In fact, those who are already retired report significantly smaller falls in consumption than are expected by those who are still working. We show that participation in the stock market plays a dominant role in explaining the gap between expectations and outcomes, indicating that much of the gap is a result of unexpected stock market appreciation. The survey produces new insights into the high level of uncertainty in the period leading up to retirement, and the surprises that may lie in store when households actually retire.

How Do Retirees Go from Stock to Flow?

When participants in a defined contribution (DC) pension plan retire, they face an important decision regarding how to spend their retirement assets. The distribution decisions they make at or near retirement can significantly affect both their retirement incomes and the benefits paid to survivors or heirs. Yet very little is known about how DC plan participants actually choose to receive distributions from their retirement assets, when a wide array of annuity options is made available to them. Using unique historical data from a major DC pension provider (TIAA-CREF), we document and discuss the income elections of participants over the period 1978-2001. We show that, following the introduction of non-annuity income options in 1988, there was a significant decline in the use of life-contingent immediate annuity income among those initiating periodic withdrawals from their retirement accounts. Differences in choices by option and accumulated asset amount are described by demographic characteristic. Patterns may have relevance to policymakers, as they continue to evaluate the role of DC pension systems and life annuities in the provision of retirement income

Measuring Self-Control

How significant are individual differences in self-control? Do these differences impact wealth accumulation? From where do they derive? Our survey-based measure of self-control provides insights into all three questions: 1.There are individual differences in self-control not only of a quantitative but also of a qualitative nature. In our sample, standard self-control problems of over-consumption are no more prevalent than are problems of under-consumption. 2.Standard self-control problems do impede wealth accumulation, particularly in liquid form. Problems of under-consumption have the opposite effects. 3.Self-control is linked to conscientiousness' much studied by psychologists. There is a related link with financial planning.

The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives

Strong bequest motives can explain low retirement spending, but so equally can strong precautionary motives. Given this identification problem, the recent tradition has been largely to ignore bequest motives. We develop a rich model of spending in retirement that allows for both motives, and introduce a "Medicaid aversion" parameter that plays a key role in determining precautionary savings. We implement a "strategic" survey to resolve the identification problem between bequest and precautionary motives. We find that strong bequest motives are too prevalent to be ignored. Moreover, Medicaid aversion is widespread, and helps explain the low spending of many middle class retirees.

Comparing Spending Approaches in Retirement

This chapter describes and evaluates alternative approaches to spending in retirement, including income annuities, common rules of thumb for spending used by financial planners and advisors, and the spending rules that have been incorporated into payout funds, a relatively new type of investment product designed to be used by investors in the spending stage of life

WP 2018-380

This research provides new empirical evidence on late-life labor market activities of American households from a new survey implemented under the Vanguard Research Initiative. The survey features following innovations: It measures detailed job characteristics not only of a career job but also of post-career bridge jobs; it examines reasons of leaving a career job and whether households would have changed their decisions under counterfactual situations; it examines post-career job search behavior of households. The research finds that, even though a direct transition from a career job to full retirement is still the most common pattern, a significant fraction of older Americans reveal interest in working beyond the career job. Within this sample of older Americans with positive financial assets, 38% of had a post-career bridge job and another 7% of them looked for a post-career employment opportunity. Low health or bad business conditions were the not the main reason for leaving the career job. Yet, for the minority of those who did leave career jobs owing to low health or bad economic conditions, had they counterfactually had better health or economic conditions, they likely would have decided to work longer. Those who work longer on their career job or have a post-career bridge job tend to work fewer hours, have a flexible schedule, and receive lower hourly wages.Social Security Administration, RRC08098401-09, UM17-04. National Institute on Aging P01-AG026571https://deepblue.lib.umich.edu/bitstream/2027.42/145484/1/wp380.pdfDescription of wp380.pdf : Working pape