Financial Advice: Does it Make a Difference?

The financial advice profession provides a potentially valuable service to consumers within an increasingly complex financial marketplace. Financial advice professionals can substitute for costly investment in financial knowledge by households. This chapter provides evidence that financial advisers can improve financial outcomes when the interests of the advisor and household are aligned. Yet professional advice can harm consumers if conflicts of interest create high agency costs. Understanding how differences in compensation methods and regulatory frameworks affect incentives is essential to improving the breadth and quality of professional advice

Spending flexibility and safe withdrawal rates

Shortfall risk retirement income analyses offer little insight into how much risk is optimal, and how risk tolerance affects retirement income decisions. This study models retirement income risk in a manner consistent with risk tolerance in portfolio selection in order to estimate optimal asset allocations and withdrawal rates for retirees with different risk attitudes. We find that the 4 percent retirement withdrawal rate strategy may only be appropriate for risk averse clients with moderate guaranteed income sources. The ability to accept greater shortfall probabilities means that risk tolerant investors will prefer a higher withdrawal rate and a riskier retirement portfolio. A risk tolerant client may prefer a withdrawal rate of between 5 and 7 percent with a guaranteed income of $20,000. The optimal retirement portfolio allocation to stock increases by between 10 and 30 percentage points and the optimal withdrawal rate increases by between 1 and 2 percentage points for clients with a guaranteed income of$60,000 instead of $20,000.retirement planning; utility maximization; retirement spending goals; safe withdrawal rates

Household financial choice : three essays

"July 2011"Title from PDF of title page (University of Missouri--Columbia, viewed on May 17, 2012).The entire thesis text is included in the research.pdf file; the official abstract appears in the short.pdf file; a non-technical public abstract appears in the public.pdf file.Dissertation advisor: Dr. John Howe.Vita.This dissertation examines household characteristics the impact financial decision making. The first essay explores the role of cognitive ability in numeracy, risk tolerance, credit decisions, wealth and retirement savings and asset allocation and finds that cognitive ability is an important predictor of financial decisions. The second essay develops a new instrument to measure time discounting and models asset accumulation and asset allocation and finds that a factor score of intertemporal behaviors is significantly related to both asset accumulation and asset allocation. The third essay documents the decline in basic financial knowledge among households over 60 using a new financial literacy instrument developed to more accurately capture a household's ability to make effective balance sheet, credit, investment, and insurance choices.Includes bibliographical reference

Low Returns and Optimal Retirement Savings

Lifetime financial outcomes relate closely to the sequence of investment returns earned over the lifecycle. Higher return assumptions allow individuals to save at a lower rate, withdraw at a higher rate, retire with a lower wealth accumulation, and enjoy a higher standard of living throughout their lifetimes. Often analysis of this topic is based on the investment performance found in historical market returns. However, at the present bond yields are historically lower and equity prices are quite high, suggesting that individuals will likely experience lower returns in the future. Increases in life expectancy, especially among higher-income workers who must also rely more heavily on their private savings to smooth spending, further increases the cost of funding retirement income today. The implications are higher savings rates, lower withdrawal rates, the need for a larger nest egg at retirement, and a lower lifetime standard of living. We demonstrate this using a basic life cycle framework, and provide a more complex analysis of optimal savings rates that incorporates Social Security, tax rates before and after retirement, actual retirement spending patterns, and differences in expected longevity by income. We find that lower-income workers will need to save about 50 percent more if low rates of return persist in the future, and higher-income workers will need to save nearly twice as much in a low return environment compared to the optimal savings using historical returns