Retirement Research: Old Age and the Decline in Investment Performance

Retirement researchers say there is evidence that age-related cognitive decline has a negative impact on a retiree’s ability to manage an investment portfolio in later life.

Author:
Retirement Daily
Publish date:
Aug 1, 2020 8:00 AM EDT

Old Age and the Decline in Investment Performance

Abstract: Retirees in industrialized societies are increasingly encouraged to fund their own spending in retirement through publicly-subsidized savings programs. Individuals are then responsible for investing these assets through retirement to support a lifestyle. Unfortunately, there is evidence that age-related cognitive decline has a negative impact on a retiree’s ability to manage an investment portfolio in later life. Individuals over age 60 exhibit a gradual decline in financial literacy that reduces observed decision-making quality. Older investors are not able to fully capture an equity risk premium that may be attributed to time-varying risk preferences that erode investment performance. A lack of awareness of decline in financial capability also increases vulnerability to financial exploitation. Improved investor protections and the use of financial instruments that automate the management of retirement portfolios to produce lifetime income can improve the financial security of retirees.

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Is Rising Household Debt Affecting Retirement Decisions?

Abstract: Household debt among older Americans approaching retirement has increased dramatically over the past couple of decades. Older households have become increasingly more indebted and more leveraged. While mortgages remain the predominant type of debt among households in their 50s and 60s, in recent years, student loan debt has also risen among these households. Using household survey data to examine how late life debt affects retirement decisions, we find that more indebted older adults are more likely to work, less likely to be retired, and on average expect to work longer than those with less debt.

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Abstract: Wealth inequality in the US is high and rising, but Social Security is generally not considered in those wealth measures. Social Security Wealth (SSW) is the present value of future benefits that an individual will receive less the present value of future taxes they will pay. When an individual enters the labor force, they generally face a lifetime of taxes to pay before they will receive any benefits, and thus their initial SSW is generally low or negative. As an individual works and pays into the system their SSW grows and generally peaks somewhere around typical Social Security benefit claim ages. The accrual of SSW over the working life is most important for lower-income workers because the progressive Social Security benefit formula means that taxes paid while working are associated with proportionally higher benefits in retirement. We estimate SSW for individuals in the Survey of Consumer Finances (SCF) for 1995 through 2016 and use a pseudo-panel approach to empirically demonstrate those lifecycle patterns. We also show that including SSW in a comprehensive wealth measure generally reduces estimated levels of wealth inequality but does not reverse the upward trend in top wealth shares.

Target-Date Funds, Glidepaths, and Risk Aversion

Abstract: Target-date funds feature asset allocations that become increasingly conservative as investors approach retirement. An important shortcoming of this strategy is that it is suboptimal in terms of capital accumulation, which begs the question of why these funds are so popular. A possible answer is that investors become more risk averse as they age, gradually favoring more downside protection as they approach retirement. The main issue explored in this article is how much more risk averse would investors need to become during their working years to select asset allocations similar to those in target-date funds; the evidence here shows that investors would have to roughly double their risk aversion during the last 25 years of their working period. An intuitive interpretation of this result, based on how much an individual would pay to avoid a gamble, is also discussed.

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