Retirement Eggs and Retirement Baskets

Abstract

How do people save across their portfolio of assets in a lifetime? Using a dynamic lifecycle model of saving and portfolio choice featuring risky labor income, housing, and safe and risky financial assets inside and outside pension plans with comprehensive choice architecture, we examine the behavior of members of an industry-wide retirement fund to assess how standard saving motives, pension defaults, investment returns, preferences and frictions interact to drive lifetime savings across major asset classes. Our results show considerable heterogeneity in what motivates people how to save. First, we find that financial and housing assets are largely driven by consumption smoothing motives. While these motives also affect plan choices, their role in pension accumulation is more limited due to default switching costs. Removing such costs, on the other hand, encourages pension savings at the expense of financial wealth but not of housing. In fact, we find higher pension assets to drive up housing wealth throughout the lifecycle, as people - anticipating a wealthier retirement and to avoid potentially larger adjustment costs later in life - lock in higher housing investments early on. Second, being luxury goods, bequest motives lead to higher DC take-up and riskier portfolios, but only to a modest mid-life financial savings boost. Third, precautionary savings that insure against wage risks have similar plan effects to bequests, although they do not translate in any wealth dynamic. Finally, removing costless redraws on mortgages leads to higher financial savings, again displacing pension balances considerably more than housing wealth.