Saving for Retirement: Understanding the Importance of Heterogeneity |
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Authors: | Andrew Samwick |
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Institution: | (1) Department of Economics, Dartmouth College, Hanover, NH 03755, USA |
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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.
JEL Classification D910 |
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Keywords: | savings household lifecycle consumption |
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