Retirement Consumption, Risk Perception and Planning Objectives of Canadian Retirees and Pre-Retirees Saisai Zhang (Jointly with Mary Hardy and David Saunders) University of Waterloo March 31, 217
Table of Contents Overview and Survey Design
Overview The Ontario Retirement Survey (ORS) 216 Target: Ontario residents age 5 to 8, 5 self-identified retirees and 5 pre-retirees Monitored: gender, age and residence Web-based survey Launch date: Sept 2, 216. Closing date: Oct 13, 215. 11 completed and 1 partially-completed Response rate: 7.7% Average survey: length 27 minutes
Survey Design Objective: 1. obtain a more complete picture of retirement experiences and objectives of Canadians 2. to compare and contrast them with assumptions made in models of lifetime portfolio selection Key interests: 1. the difference between expectations and experience among Canadian retirees 2. current level of wealth in retirement, or savings pre-retirement 3. preferences and risk aversion Adaptive survey
Retirement Status Retired (FT) Retired (PT) Retired (NW) Not Retired (FT) Not Retired (PT) Not Retired (NW) 8% < 1% 1% 11% 41% 29%
Wealth Status Low Medium High 18% 61% 21%
Wealth by Gender Female 14% Low Medium High Male 21% Low Medium High 2% 56% 66% 23%
Expectation and Experience - an example Pre-retirees: Please indicate the approximate amount you and your spouse/partner expect to receive, in the first year of your retirement. Retirees: Please indicate the approximate amount you and your spouse/partner received from the following sources, in the first year of your retirement
Retirement Age 1. Pre-retirees expect higher retirement age than retirees age of retirement 2. Some pre-retirees expect to never retire Pre-retirees, Expected Retirement Age. (Mean, Median): (67.193,65) 18 16 14 12 1 8 6 4 2 18 16 14 12 1 8 6 4 2 Retirees, Actual Retirement Age. (Mean, Median): (58.588,6) 2 3 4 5 6 7 8 9 1 11 2 3 4 5 6 7 8 9 1 11
Retirement Liquid Assets Married 1. Pre-retirees expect to have higher liquid assets than retirees had at retirement 2. Married individuals: more assets (e.g. more income + shared cost) Pre-retirees, Married: Expected Retirement Liquid Assets. (Mean, Median): (4.7923,4) 7 Retirees, Married: Actual Retirement Liquid Assets. (Mean, Median): (4.661,3.5) 7 6 6 5 5 4 4 3 3 2 2 1 1 <25, 25,999,999 1,9199,999 2,9299,999 3,9399,999 4,9499,999 5,9599,999 6,9699,999 7,9799,999 8,9899,999 9,91,, >1,, <25, 25,999,999 1,9199,999 2,9299,999 3,9399,999 4,9499,999 5,9599,999 6,9699,999 7,9799,999 8,9899,999 9,91,, >1,,
Retirement Real Estate Married 1. Pre-retirees expect higher property level than retirees had at retirement 2. Married retirees tend to have higher property level 12 Pre-retirees, Married: Expected Retirement Liquid Assets. (Mean, Median): (5.659,5.5) 12 Retirees, Married: Actual Retirement Liquid Assets. (Mean, Median): (5.91,5) 1 1 8 8 6 6 4 4 2 2 Do not own <25, 25,999,999 1,9199,999 2,9399,999 4,9599,999 6,9799,999 8,9999,999 1,,91,299,999 1,3,91,599,999 1,6,91,999,999 2,,93,, >3,, Do not own <25, 25,999,999 1,9199,999 2,9399,999 4,9599,999 6,9799,999 8,9999,999 1,,91,299,999 1,3,91,599,999 1,6,91,999,999 2,,93,, >3,,
Retirement Income I: DB Married 1. Pre-retirees expected lower DB income than retirees had at retirement 2. DB trend Pre-retirees, Married: Expected Retirement DB Income. (Mean, Median): (2.7581,2) 15 Retirees, Married: Actual Retirement DB Income. (Mean, Median): (2.9915,3) 15 1 1 5 5 Do not have <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,9159,999 16,9179,999 18,92, >2, Do not have <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,9159,999 16,9179,999 18,92, >2,
Retirement Income II: Government Support Married 1. Pre-retirees expect much higher government support than retirees had at retirement 2% Pre-retirees, Married: Expected Retirement Gov Support. (Mean, Median): (3.4745,3) 14 Retirees, Married: Actual Retirement Gov Support. (Mean, Median): (2.6761,2) 14 12 12 1 1 8 8 6 6 4 4 2 2 <6, 6,911,999 12,917,999 18,923,999 24,929,999 3,935,999 36,941,999 42,947,999 48,953,999 54,96, >6, <6, <6, 6,911,999 12,917,999 18,923,999 24,929,999 3,935,999 36,941,999 42,947,999 48,953,999 54,96, >6, <6,
Retirement Income III: Life Annuities Married 1. Majority did not expect/have annuities 2. Pre-retirees expect higher annuity income than retirees had at retirement Pre-retirees, Married: Expected Retirement Annuity Income. (Mean, Median): (1.5148,1) 35 Retirees, Married: Actual Retirement Annuity Income. (Mean, Median): (1.2366,1) 35 3 3 25 25 2 2 15 15 1 1 5 5 Do not have/plan <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,916, >16, Do not have/plan <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,916, >16,
Retirement Income IIII: Withdrawals Married 1. Pre-retirees expect higher withdrawals than retirees had at retirement Pre-retirees, Married: Expected Retirement Withdrawals. (Mean, Median): (1.7695,1) 3 Retirees, Married: Actual Retirement Withdrawals. (Mean, Median): (1.629,1) 3 25 25 2 2 15 15 1 1 5 5 <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,9159,999 16,9179,999 18,92, >2, <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,9159,999 16,9179,999 18,92, >2,
Retirement Income V: Other Sources Married 1. Pre-retirees expect lower income from other sources than retirees had at retirement Pre-retirees, Married: Expected Retirement Income (other sources). (Mean, Median): (1.5375,1) 25 Retirees, Married: Actual Retirement Income (other sources). (Mean, Median): (1.762,1) 25 2 2 15 15 1 1 5 5 <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,9159,999 16,9179,999 18,92, >2, <2, 2,939,999 4,959,999 6,979,999 8,999,999 1,9119,999 12,9139,999 14,9159,999 16,9179,999 18,92, >2,
Savings and Spending Concerns Top four concerns: 1. Setting money aside to access quickly when unforeseen expenses arise 2. The impact of inflation on my standard of living 3. The possibility of living longer than expected 4. Avoiding ups and downs in my income having a smooth income stream during retirement
Real Estate (net mortgage) at Retirement (C$) Liquid assets and real estate 1%: low liquid wealth and no property Less cash-wealthy groups do not have much tied up in property >3,, 2,,93,, 1,6,91,999,999 1,3,91,599,999 1,,91,299,999 8,9999,999 6,9799,999 4,9599,999 2,9399,999 1,9199,999 25,999,999 <25, Do not own Frequency Plot: All Participants <25, 25,999,999 1,9199,999 2,9299,999 3,9399,999 4,9499,999 5,9599,999 6,9699,999 7,9799,999 8,9899,999 9,91,, >1,, Liquid Assets at Retirement (C$).9.8.7.6.5.4.3.2.1
Max Price for Mthly Income of $1 at Retirement (C$) Frequency Plot: All Participants Liquid assets and annuity purchase High unwillingness to purchase annuities >3, 27,93, 24,926,999 21,923,999 18,92,999 15,917,999 12,914,999 9,911,999 6,98,999 3,95,999 <3, <25, 25,999,999 1,9199,999 2,9299,999 3,9399,999 4,9499,999 5,9599,999 6,9699,999 7,9799,999 8,9899,999 9,91,, >1,, Liquid Assets at Retirement (C$).16.14.12.1.8.6.4.2
Liquid assets and seeking professional financial advice Top 3 concerns: 1. Professional advisors acting in their own best interest rather than mine 2. Accessing high quality services 3. The capability of advisors to address my concerns or improve my financial welfare Past/Future: Yes/Yes Past/Future: No/Yes Past/Future: Yes/No Past/Future: No/No 47% 31% 9% 13%
Risk Aversion Elicitation (Low vs High Stake) 1. Retirees more risk averse 2. Higher relative risk aversion when higher stake is involved 3. RRA 2. for pre-retirees, RRA 3. for retirees, 5 Risk Aversion - Low Stake (Option 4 to 5 implies CRRA range: 1.74 9 3.74) 15 Risk Aversion - High Stake (Option 14 to 15 implies CRRA range: 1.74 9 3.74) 4.9 14.9 4.8 14.8 4.7 14.7 4.6 14.6 4.5 14.5 4.4 14.4 4.3 14.3 4.2 14.2 4.1 14.1 4 Pre-Retirees Retirees 14 Pre-Retirees Retirees
Retirement Planning Objectives Hypothetical annuitization decisions under: 1. Inflation risk 2. Investment risk Beshears et al (214)
Investment Risk Suppose that you are 65 years old and you are JUST about to retire. Your employer will pay you monthly pension income payments for the rest of your life. The pension will stop when you die. Your employer presents you with the following pension options: 1. Equity-Linked Pension Option This option pays a monthly pension with payments linked to stock market performance. Every year your pension will be re-evaluated based on the performance of the stock market. This means that your pension income payments are uncertain and will experience some ups and downs. 2. Steady Pension Option This option pays a constant monthly pension that does not change.
If you choose the Equity-Linked Pension Option, Your first monthly income payment will be $2,516. Your future monthly pension has an equal chance of being any one of the 1 coloured pension paths as shown in the chart below. If you choose the Steady Pension Option, Your first monthly income payment will be $2,358. Your future monthly pension will stay the same for the rest of your life, as shown by the black line in the chart below. *Note the difference in the first monthly income payments.
Dependence with wealth and risk aversion Dependence with government pension, income withdrawals
Beshears, J., Choi, J. J., Laibson, D., Madrian, B. C., and Zeldes, S. P. (214). What makes annuitization more appealing? Journal of public economics, 116:2 16. Mathew Greenwald & Associates Inc. (213). Risks and Process of Retirement Survey Report of Findings.