Financing Retirement: Research from the TIAA-CREF Institute

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   E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                   A N D   P E N S I O N   L A W
                 Vol. 2, No. 22: November 29, 2001
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                       Topic of This Issue:
              Financing Retirement: Research from the
                       TIAA-CREF Institute
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T A B L E of C O N T E N T S
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WORKING PAPERS

"Portfolio Choice in Retirement Accounts: An Analysis of
Longitudinal Data from TIAA-CREF"
      JOHN AMERIKS
         Teachers Insurance and Annuity Association,
         TIAA-CREF Institute
      STEPHEN P. ZELDES
         Columbia Business School
         National Bureau of Economic Research (NBER)

"How Do Household Portfolio Shares Vary With Age?"
      JOHN AMERIKS
         Teachers Insurance and Annuity Association,
         TIAA-CREF Institute
      STEPHEN P. ZELDES
         Columbia Business School
         National Bureau of Economic Research (NBER)

"Financial Education and Retirement Savings"
      ROBERT L. CLARK
         North Carolina State University
      MADELEINE D'AMBROSIO
         Teachers Insurance and Annuity Association,
         TIAA-CREF Institute
      PAUL W. MULVEY
         North Carolina State University
         Business Management Department

"Making Retirement Income Last a Lifetime"
      JOHN AMERIKS
         Teachers Insurance and Annuity Association,
         TIAA-CREF Institute
      ROBERT VERES
         Inside Information
      MARK J. WARSHAWSKY
         Teachers Insurance and Annuity Association,
         TIAA-CREF Institute

"The Response of TIAA-CREF Participants to Software-driven Asset
Allocation Guidance"
      JOHN AMERIKS
         Teachers Insurance and Annuity Association,
         TIAA-CREF Institute

"The Market for Individual Life Annuities and the Reform of
Social Security: An Update and Further Analysis"
      MARK J. WARSHAWSKY
         Teachers Insurance and Annuity Association,
         TIAA-CREF Institute

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W O R K I N G P A P E R Abstracts
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"Portfolio Choice in Retirement Accounts: An Analysis of
Longitudinal Data from TIAA-CREF"

       BY: JOHN AMERIKS
               Teachers Insurance and Annuity Association,
               TIAA-CREF Institute
            STEPHEN P. ZELDES
               Columbia Business School
               National Bureau of Economic Research (NBER)

Paper ID: TIAA-CREF Working Paper
Date: January 21, 1998

Contact: JOHN AMERIKS
    Email: Mailto:jameriks@tiaa-cref.org
   Postal: Teachers Insurance and Annuity Association, TIAA-CREF
            Institute
            730 Third Avenue
            New York, NY 10017-3206 USA
Co-Auth: STEPHEN P. ZELDES
    Email: Mailto:stephen.zeldes@columbia.edu
   Postal: Columbia Business School
            Uris 605B, Dept. of Finance & Economics
            3022 Broadway
            New York, NY 10027 USA

ABSTRACT:
One of the key questions that arises when analyzing Social
Security privatization is: What kind of portfolio choices would
people make if they were offered individual accounts, and how
would retirement income be affected by their choices?

This document provides a brief report on research that has
been conducted on portfolio choices that TIAA-CREF participants
have made over the ten year period from 1987 to 1996. The
research is based on several sources of data, including a large
panel dataset constructed at TIAA-CREF.

The data was used to study several empirical questions in an
attempt to assess the importance of variation and diversity in
financial behavior. These questions include: What relationships
exist between the individual portfolio choices and
characteristics such as sex, age, wealth, income, or education?
How much diversity is there in behavior that is unexplained by
the above factors? To what extent do individuals hold portfolios
that are significantly skewed toward a single asset or asset
class? What trends exist in the data and to what extent are
these trends a function of changes in behavior of existing
participants as opposed to changes in the population of
participants? How active are participants in managing their
retirement assets and how frequently do they change allocations
of new contribution flows or existing balances?

In an additional section of the document the authors describe
and discuss some of the details of the data used, another
section approaches each of the above research questions and a
final section offers conclusions.

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"How Do Household Portfolio Shares Vary With Age?"

Paper ID: TIAA-CREF Working Paper
Date: September 25, 2000

ABSTRACT:
Using pooled cross-sectional data from the Surveys of Consumer
Finances, and new panel data from TIAA-CREF, we examine the
empirical relationship between age and portfolio choice,
focusing on the observed relationship between age and the
fraction of wealth held in the stock market. We illustrate and
discuss the importance of the well-known identification problem
that prevents unrestricted estimation of age, time and cohort
effects in longitudinal data. We also document three important
features of household portfolio behavior: significant
non-stockownership, wide-ranging heterogeneity in allocation
choices, and the infrequency of active portfolio allocation
changes. Based on a specification including age effects and time
effects (excluding cohort effects) we find that equity ownership
has a hump-shape pattern with age, while equity shares
conditional on ownership are nearly constant across age groups.
Based on a specification that includes age effects and cohort
effects (excluding time effects), we find that equity portfolio
shares increase strongly with age. Following the same
individuals over time, we find that almost half of the sample
members made no active changes to their portfolio allocations
over our nine-year sample period, while the vast majority of
those who did make changes increased their allocations to equity
as they aged.

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"Financial Education and Retirement Savings"

       BY: ROBERT L. CLARK
               North Carolina State University
            MADELEINE D'AMBROSIO
               Teachers Insurance and Annuity Association,
               TIAA-CREF Institute
            PAUL W. MULVEY
               North Carolina State University
               Business Management Department

Paper ID: TIAA-CREF Working Paper
Date: October 2001

Contact: ROBERT L. CLARK
    Email: Mailto:robert_clark@ncsu.edu
   Postal: North Carolina State University
            College of Management
            Raleigh, NC 27695 USA
    Phone: 919-515-5560
      Fax: 919-515-5564
Co-Auth: MADELEINE D'AMBROSIO
    Email: Mailto:mdambrosio@tiaa-cref.org
   Postal: Teachers Insurance and Annuity Association, TIAA-CREF
            Institute
            730 Third Avenue
            New York, NY 10017-3206 USA
Co-Auth: PAUL W. MULVEY
    Email: not available
   Postal: North Carolina State University
            Business Management Department
            Raleigh, NC 27695 USA

ABSTRACT:
Increasingly, American workers are being required to make
important decisions concerning their retirement savings. These
choices include whether to make contributions to their basic and
supplemental pension plans, how much to contribute to these
plans, and how to manage the assets in their individual
accounts.

Concern has been expressed that workers may start contributing
too late, contribute too little, and make inappropriate
investment choices. As a result, the value of accounts at
retirement will not be sufficient to provide an adequate
retirement income.

If lack of financial education is the cause of inadequate
savings, could educational and communication programs heighten
understanding of basic financial principles and lead to greater
retirement savings and a better investment strategy? Additional
research is needed to determine whether such programs alter
savings attitudes and behavior in the short and long run and
thus produce greater income in retirement.

A key research and policy question is: Are financial education
programs effective in altering retirement savings goals and
choices such as how much to contribute to retirement accounts,
appropriate risk-return selections concerning portfolio
allocations, income needs in retirement, and selection of
retirement options offered by a pension plan? TIAA-CREF seminar
participants respond to the information provided through the use
of before and after surveys.

______________________________

"Making Retirement Income Last a Lifetime"

       BY: JOHN AMERIKS
               Teachers Insurance and Annuity Association,
               TIAA-CREF Institute
            ROBERT VERES
               Inside Information
            MARK J. WARSHAWSKY
               Teachers Insurance and Annuity Association,
               TIAA-CREF Institute

Paper ID: TIAA-CREF Working Paper
Date: August 7, 2001

Contact: JOHN AMERIKS
    Email: Mailto:jameriks@tiaa-cref.org
   Postal: Teachers Insurance and Annuity Association, TIAA-CREF
            Institute
            730 Third Avenue
            New York, NY 10017-3206 USA
Co-Auth: ROBERT VERES
    Email: Mailto:bobveres@yahoo.com
   Postal: Inside Information
            P.O. Box 820
            Mars Hill, NC 28754 USA
Co-Auth: MARK J. WARSHAWSKY
    Email: Mailto:mwarshawsky@tiaa-cref.org
   Postal: Teachers Insurance and Annuity Association, TIAA-CREF
            Institute
            24th Floor
            730 Third Avenue
            New York, NY 10017-3206 USA

ABSTRACT:
Professional retirement planning advice relies to a great extent
on the determination of how much retirement income can be
provided by systematic withdrawals from an investment portfolio.
Because future investment returns, inflation rates, and how long
a retiree will live are unknown, one cannot know, with
certainty, how much income a retirement portfolio can ultimately
provide. Recent research has incorporated uncertainty regarding
investment returns and inflation in estimating maximum safe
portfolio withdrawal rates. However, uncertainty regarding
length of life has not been fully considered. The goal of this
article is to explore the sustainability of investment portfolio
withdrawals using two distinct methodologies - historical
analysis and Monte Carlo simulations - to address the risk of
extreme longevity. The article also examines whether annuitizing
a portion of client assets makes it more likely that retirees
can enjoy higher incomes over longer retirements. The results of
the analysis may lead financial advisors to reconsider
recommendations regarding the structure of their clients'
investment portfolios in retirement.

______________________________

"The Response of TIAA-CREF Participants to Software-driven Asset
Allocation Guidance"

       BY: JOHN AMERIKS
               Teachers Insurance and Annuity Association,
               TIAA-CREF Institute

Paper ID: TIAA-CREF Working Paper
Date: August 8, 2001

ABSTRACT:
This paper examines the response of a large group of TIAA-CREF
retirement plan participants to participation in an
asset-allocation guidance session in which a software-driven
allocation tool plays a major role. Several aspects of the
"treatment effect" of the guidance session on individual asset
allocation are discussed and analyzed. The paper also presents a
description and analysis of the responses of participants to the
queries posed by the software-based asset allocation tool, as
well as the tool's output. The guidance sessions are shown to
have a significant, positive impact on the likelihood that
participants will reallocate assets or begin directing
contributions to recommended investment accounts that they were
not using prior to the guidance session. While the majority of
participants do not appear to adopt the exact advice
recommendations, the changes they make to their investment
allocations appear to be positively related to the
recommendations received. In addition, the data show strong
gender-based differences in participant responses to the
software's interrogatory questions.

______________________________

"The Market for Individual Life Annuities and the Reform of
Social Security: An Update and Further Analysis"

       BY: MARK J. WARSHAWSKY
               Teachers Insurance and Annuity Association,
               TIAA-CREF Institute

Paper ID: TIAA-CREF Working Paper
Date: July 17, 2001

Contact: MARK J. WARSHAWSKY
    Email: Mailto:mwarshawsky@tiaa-cref.org
   Postal: Teachers Insurance and Annuity Association, TIAA-CREF
            Institute
            24th Floor
            730 Third Avenue
            New York, NY 10017-3206 USA
    Phone: (212) 916-6376
      Fax: (212) 916-6849

ABSTRACT:
Current policy discussions about Social Security individual
accounts ("IAs") emphasize the creation of personal estates
rather than the provision of lifelong retirement income. This
update of an earlier analysis introduces new empirical evidence
and reviews more carefully various policy and administrative
considerations in the use of life annuities for the distribution
of IA assets. It confirms that there are good arguments for a
system requiring or favoring the annuitization of IAs at
retirement. Compared to the current Social Security benefit
structure, however, the use of various existing types of
individual immediate life annuities can allow for greater
freedom of action and expression of preferences among investment
types and benefit features, also addressing issues of fairness
and allowing for provision of bequests. In particular, a death
benefit before annuitization and a cash refund life annuity upon
retirement would represent a significant liberalization from the
current system.