How Accurate Are Expected Retirement Savings?

1. How Accurate AreExpected 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.

2. Motivation • 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

3. Motivation • 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

4. Our 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.

5. Three 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?

6. 1. Do individuals respond to question?

7. 2. Who provides a value response?

8. 3. What types of responses are given? Note: value responders, nominal dollars

9. 3. What types of responses are given? Note: value responders, 2004 dollars

10. 4. How accurate are expected savings?

11. 5. Are expectations predictive and rational?

12. Conclusion and future work How accurate are expected retirement savings? • Conclusions • Workers are generally willing to respond to question • Expected savings are predictive and, on average, are accurate • Substantial deviations exist between expectations and realizations of retirement savings • Next steps • Do deviations from expectations affect retirement outcomes? • Explore alternative response models (e.g., modal response) • Include bracket responders