Saving preferences in retirement: the impact of mandatory annuitisation flexibility and health statu

Saving preferences in retirement: the impact of mandatory annuitisation flexibility and health statu

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Speaker(s): Jennifer Alonso-García (UNSW Sydney, CEPAR)

Globally, more reliance is increasingly being placed on pre-funding as an ageing demographic renders unfunded social security structures unsustainable. Pre-funding creates very large privately held retirement asset pools in pension funds and insurance companies as the system
matures. For example, current assets under management total AUD2.2 trillion in Australia and in the Netherlands, more than 100% of GDP in each case. To better design insurance products offered during retirement, insurers and policymakers need to understand the retirement savings preferences of people in retirement. The emphasis of the literature has been on the empirical analysis of rational explanations of individuals saving and spending conservatively during retirement. However, an increasing number of studies suggest that behavioural and
psychological motives may be important to explain individual's financial choices for (retirement) consumption and saving. In this project, we elicit the impact of pension policy design (prescribed longevity insurance versus flexibility of drawdown from a retirement accumulation) and health status (becoming frail and/or losing a spouse) on savings preferences in retirement. We do so by conducting an experimental survey of retirement saving and spending decisions of soon to retire households in Australia and the Netherlands. We find that expected health shocks or death of a spouse are associated with an increasing importance to save for health-related expenses, to provide for your spouse after death (intra-household bequest) and to have a peace of mind. Pension policy design (mandatory longevity insurance or flexibility) seems to have a reduced impact on saving preferences. Our results suggest that Australians and Dutch currently consuming conservatively during retirement do so primarily to save for health-related expenses and to be able to enjoy life at later stages of retirement. Insurance products that better meet the needs of increasingly heterogeneous retirement cohorts should take these insights into consideration.

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