1. How Accurate Are Expected Retirement Savings? How Accurate Are 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.

2. Motivation nThe lifecycle model is the primary framework for understanding how individuals formulate consumption and savings decisions nImplications for a number of important literatures such as responses to tax policy and understanding retirement behavior nThe lifecycle model is premised on forward-looking behavior nIndividuals need to gather an array of information to make consumption and work decisions nInformation gathering can be costly and time consuming

3. Motivation nQuestion: How accurate are expected retirement savings? nAn important question for understanding retirement outcomes nStudies have documented gaps in knowledge of retirement plans and a substantial lack of planning behaviors nSubjective expectations are predictive of future outcomes across a number of domains nMortality, income, and job loss nRetirement literature: retirement date, Social Security benefits, return to work

4. Our data n2 data sets nHealth and Retirement Study (HRS) original cohort, 1992-2002 nRetirement History Survey (RHS), 1969-79 nThe key question nHRS 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] nRHS 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)?” nSample details nMen who were working and reported they expected to retire nActual savings: sum of cash balances in saving accounts, checking accounts, CDs, stocks, bonds, mutual funds, etc.

5. Three methodological issues nHRS 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] nThree important attributes nThe question is difficult to answer nAffected 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 nThe question asks about a subcategory of the wealth portfolio nAccount balances are bounded from below at zero nIndividuals must also think about portfolio choice nThe question asks “do you expect” nDo respondents provide mathematical expectation?

6. 1. Do individuals respond to question?

7. 2. Who provides a value response? HRS N=2,995 RHS N=4,183 (1)(2)(3)(4)(5) Demographic and financial characteristics Yes Retirement planning variables Yes Missing financial values or exp. retirement date Yes Uses focal responses to prob. questions Yes R-square0.0190.1350.1370.0230.185

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

9. 3. What types of responses are given? HRSRHS Mean180,76171,271 % zeroes20.2%39.8% 5 th 00 10 th 00 25 th 12,6120 50 th 63,06210,287 75 th 138,17854,434 90 th 378,376171,445 95 th 630,628257,167 Note: value responders, 2004 dollars

10. 4. How accurate are expected savings?

11. 5. Are expectations predictive and rational? HRSRHS (1)(2)(3)(4)(5)(6) Intercept200896007820024855589006972 (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-square0.4170.2760.4180.3120.2710.365

12. Conclusion and future work How accurate are expected retirement savings? nConclusions 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 nNext steps 1.Do deviations from expectations affect retirement outcomes? 2.Explore alternative response models (e.g., modal response) 3.Include bracket responders