How Accurate AreHow Accurate AreExpected Retirement Savings?Expected Retirement Savings?

Steven J. Haider, Michigan State University

Melvin Stephens Jr, Carnegie Mellon University and NBER

August 2006

This paper was prepared for the 8th Annual Joint Conference of the Retirement Research Consortium “Pathways to a Secure Retirement”, August 10-11, 2006, in Washington, D.C.

The authors gratefully acknowledge the financial support of the Social Security Administration through the Michigan Retirement Research Center (MRRC). The opinions and conclusions are solely those of the authors.

MotivationMotivation

The lifecycle model is the primary framework for understanding how individuals formulate consumption and savings decisions Implications for a number of important literatures such as

responses to tax policy and understanding retirement behavior

The lifecycle model is premised on forward-looking behavior Individuals need to gather an array of information to make

consumption and work decisions Information gathering can be costly and time consuming

MotivationMotivation

Question: How accurate are expected retirement savings? An important question for understanding retirement outcomes Studies have documented gaps in knowledge of retirement

plans and a substantial lack of planning behaviors

Subjective expectations are predictive of future outcomes across a number of domains Mortality, income, and job loss Retirement literature: retirement date, Social Security benefits,

return to work

Our dataOur data 2 data sets

Health and Retirement Study (HRS) original cohort, 1992-2002 Retirement History Survey (RHS), 1969-79

The key question HRS 1992: “Not counting IRA, KEOGH, or any pension fund assets

that you may have, roughly how much savings and reserve funds do you expect to have accumulated by the time you retire?” [unfolding brackets available]

RHS 1969: “Altogether about how much do you expect to have accumulated when you retire, such as money in saving accounts, investments, profit-sharing plans, reserve funds, and anything else (not including this house)?”

Sample details Men who were working and reported they expected to retire Actual savings: sum of cash balances in saving accounts, checking

accounts, CDs, stocks, bonds, mutual funds, etc.

Three methodological issuesThree methodological issues

HRS 1992: “Not counting IRA, KEOGH, or any pension fund assets that you [and your (wife/husband/partner)] may have, roughly how much savings and reserve funds do you expect to have accumulated by the time you retire?” [unfolding brackets available]

Three important attributes The question is difficult to answer

Affected by uncertain future income sources such as labor earnings and capital income as well as preferences regarding when to retire and how to spread expenditures over the lifetime

The question asks about a subcategory of the wealth portfolio Account balances are bounded from below at zero Individuals must also think about portfolio choice

The question asks “do you expect” Do respondents provide mathematical expectation?

1. Do individuals respond to question?1. Do individuals respond to question?

HRS

Value57%

Bracket39%

Missing4%

RHS

Value81%

Missing19%

2. Who provides a value response?2. Who provides a value response?

HRS

N=2,995

RHS

N=4,183

(1) (2) (3) (4) (5)

Demographic and financial characteristics

Yes Yes Yes Yes Yes

Retirement planning variables

Yes Yes Yes Yes Yes

Missing financial values or exp. retirement date

Yes Yes Yes

Uses focal responses to prob. questions

Yes

R-square 0.019 0.135 0.137 0.023 0.185

3. What types of responses are given?3. What types of responses are given?

Panel A: HRS

0

5

10

15

20

25

30

01-

9 1011

-19 20

21-2

9 3031

-39 40

41-4

9 5051

-59 60

61-6

9 7071

-79 80

81-8

9 9091

-99

100

101-

109

110

111+

Bins (1000s)

Per

cent

Note: value responders, nominal dollars

3. What types of responses are given?3. What types of responses are given?HRS RHS

Mean 180,761 71,271

% zeroes 20.2% 39.8%

5th 0 0

10th 0 0

25th 12,612 0

50th 63,062 10,287

75th 138,178 54,434

90th 378,376 171,445

95th 630,628 257,167

Note: value responders, 2004 dollars

05

1015

Act

ual

Re

tirem

ent

Sav

ings

( lo

gs

)

0 5 10 15Expected Retirement Savings (logs)

save1 45-line lowess

HRS

4. How accurate are expected savings?4. How accurate are expected savings?

05

1015

Act

ual

Re

tirem

ent

Sav

ings

( lo

gs

)

0 5 10 15Expected Retirement Savings (logs)

save1 45-line lowess

RHS

5. Are expectations predictive and rational?5. Are expectations predictive and rational?

HRS RHS

(1) (2) (3) (4) (5) (6)

Intercept 20089 60078 20024 8555 8900 6972

(12900) (14021) (12895) (747) (771) (732)

Wave 1 expected savings

0.979

(0.040)

0.915

(0.065)

0.553

(0.021)

0.380

(0.026)

Wave 1 actual savings

1.323

(0.075)

0.137

(0.107)

0.750

(0.320)

0.416

(0.037)

R-square 0.417 0.276 0.418 0.312 0.271 0.365

Conclusion and future workConclusion and future work

How accurate are expected retirement savings?

Conclusions

1. Workers are generally willing to respond to question

2. Expected savings are predictive and, on average, are accurate

3. Substantial deviations exist between expectations and realizations of retirement savings

Next steps

1. Do deviations from expectations affect retirement outcomes?

2. Explore alternative response models (e.g., modal response)

3. Include bracket responders