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Saving for Retirement: Understanding the Importance of Heterogeneity

Saving for Retirement: Understanding the Importance of Heterogeneity Abstract A large number of households spend much of their working lives not engaged in saving for retirement, in contrast to the basic proposition that motivates the lifecycle model of consumption. This article discusses the relationship between this observed savings behavior and three specific areas of heterogeneity in the household consumption problem: budget constraints, savings motives, and preferences. Using the Surveys of Consumer Finances, the article shows that saving for liquidity (precautionary motives) and saving for specific purchases (like housing and education) compete with saving for retirement and may explain why the median household approaches the last years of its working life with only a year's worth of income in financial assets. Another part of the explanation is shown to be high discount rates or rates of time preference, which cause households to engage in “buffer-stock” saving over the earliest years of their working lives. Heterogeneity in motives and preferences for saving present a challenge to financial professionals and policy makers who hope to encourage more people to save actively for retirement. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Business Economics Springer Journals

Saving for Retirement: Understanding the Importance of Heterogeneity

Business Economics , Volume 41 (1): 7 – Jan 1, 2006

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References (10)

Publisher
Springer Journals
Copyright
2006 National Association for Business Economics
ISSN
0007-666X
eISSN
1554-432X
DOI
10.2145/20060103
Publisher site
See Article on Publisher Site

Abstract

Abstract A large number of households spend much of their working lives not engaged in saving for retirement, in contrast to the basic proposition that motivates the lifecycle model of consumption. This article discusses the relationship between this observed savings behavior and three specific areas of heterogeneity in the household consumption problem: budget constraints, savings motives, and preferences. Using the Surveys of Consumer Finances, the article shows that saving for liquidity (precautionary motives) and saving for specific purchases (like housing and education) compete with saving for retirement and may explain why the median household approaches the last years of its working life with only a year's worth of income in financial assets. Another part of the explanation is shown to be high discount rates or rates of time preference, which cause households to engage in “buffer-stock” saving over the earliest years of their working lives. Heterogeneity in motives and preferences for saving present a challenge to financial professionals and policy makers who hope to encourage more people to save actively for retirement.

Journal

Business EconomicsSpringer Journals

Published: Jan 1, 2006

Keywords: economics, general; political economy/economic systems; business and management, general

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