Retirement Eggs and Retirement Baskets

91 Pages Posted: 8 Apr 2022

See all articles by Loretti Dobrescu

Loretti Dobrescu

UNSW Australia Business School, School of Economics

Akshay Shanker

University of New South Wales (UNSW)

Hazel Bateman

UNSW Sydney, CEPAR

Ben Rhodri Newell

Independent

Susan Thorp

The University of Sydney Business School

Date Written: March 29, 2022

Abstract

How do people save over their lifetime? Using a dynamic lifecycle model of saving and portfolio choice featuring risky labor income, housing, and safe and risky financial assets inside and outside pension plans with comprehensive choice architecture, we examine the behavior of members of an industry-wide retirement fund to assess how standard saving motives, pension defaults, investment returns, preferences and frictions interact to drive lifetime savings across major asset classes. Our results show considerable heterogeneity in what motivates people how to save. First, we find that financial and housing assets are largely driven by consumption smoothing motives. While these motives also affect plan choices, their role in pension accumulation is more limited due to default switching costs. Removing such costs, on the other hand, encourages pension savings at the expense of financial wealth but not of housing. In fact, we find higher pension assets to drive up housing wealth throughout the lifecycle, as people - anticipating a wealthier retirement and to avoid potentially larger adjustment costs later in life - lock in higher housing investments early on. Second, being luxury goods, bequest motives lead to higher DC take-up and riskier portfolios, but only to a modest mid-life financial savings boost. Third, precautionary savings that insure against wage risks have similar plan effects to bequests, although they do not translate in any wealth dynamic. Finally, removing costless redraws on mortgages leads to higher financial savings, again displacing pension balances considerably more than housing wealth.

Keywords: lifetime savings, portfolio choice, income risk, defaults, method of moments

JEL Classification: H8, J26, J32

Suggested Citation

Dobrescu, Loretti Isabella and Shanker, Akshay and Bateman, Hazel and Newell, Ben Rhodri and Thorp, Susan, Retirement Eggs and Retirement Baskets (March 29, 2022). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4069226 or http://dx.doi.org/10.2139/ssrn.4069226

Loretti Isabella Dobrescu (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Akshay Shanker

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Hazel Bateman

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Ben Rhodri Newell

Independent

Susan Thorp

The University of Sydney Business School ( email )

Abercrombie Building
H70
The University Of Sydney, NSW 2006
Australia
0290366354 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
46
Abstract Views
137
PlumX Metrics