TITLE

Saving for Retirement: Understanding the Importance of Heterogeneity

AUTHOR(S)
Samwick, Andrew A.
PUB. DATE
January 2006
SOURCE
Business Economics;Jan2006, Vol. 41 Issue 1, p21
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
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 life-cycle 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.
ACCESSION #
19836290

 

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