Abstract
This chapter describes the findings of the consumer retirement survey on individual FPB and so represents the core of the empirical analysis. In the first sub-chapter, the different investor groups with a higher or a lower risk capability than the average investor are pooled into homogenous investor types, based on similar socio-economic and socio-demographic characteristics. These investor types show statistically distinct profiles, contain a sufficiently high number of individuals and so avoid an atomization of results. They are first characterized with regard to their socio-demographic and socio-economic attributes and then used as vehicles for the further empirical analyses. The FP perspectives of these investor types are described in sub-chapter 6.2. In sub-chapter 6.3, the effective FP actions are analyzed and compared to the principles for FP actions, set-up in the normative part of this study. Sub-chapter 6.4 then introduces a simulation to determine the existence of a retirement gap and the resultant required saving rate for the individual investor types. Furthermore, it discusses different scenarios as to when the financial assets of an individual are ebbing out or which levers individuals can pull to improve the outlook of their financial situation in retirement.
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References
Investment in tangibles such as real estate is considered as an inflation hedge and providing long-term growth. Furthermore, it is inked to pride of ownership and can therefore at the same time serve as investments and sources of pleasure. The value of property however depends on its marketability and liquidity. „Marketability means you can find a ready market if you want to sell the investment. Liquidity means the investment is not only marketable and easily accessible but also has a stable price.“ Shim/Siegel 1991, p. 232. Beck 2006 put the value of real estate as the right kind of provision for retirement into question for the disadvantages linked to this marketability and liquidity, due to the existence of a chunk risk (one would never invest that much into one single stock) and because the return depends on very specific characteristics such as e.g., the location, while the maintenance and opportunity costs need to be considered as well. Therefore, living in a house is never for free. See Beck 2006, p. 9.
The age distribution of this investor group reveals that 5% of the interviewees are older than 65 and still working (at least part-time). This is a phenomenon confirmed by Kortmann et al. 2005 who find that a higher share of self-employed individuals is still gainfully employed at the age of 65. See Kortmann et al. 2005, p. 34.
Both indications about the share of women in the population relate to the year 2001 and are based on the population distribution of the German Statistical Federal Office. See STBA 2005a.
Indication about the share of women in the population relates to the year 2001 and is based on the population distribution of the German Statistical Federal Office. See STBA 2005a.
Fabricius 2001, for example, confirmed that individuals with academic education tend to get married later and also have a lower probability to have children.
See Borgmann 2005, p. 3ff.
See Sierminska et al. 2006, p. 16.
According to Börsch-Supan et al. 2005 the average retirement age is 60 in Germany. Indication relates to the years 1999 and 2001. See Börsch-Supan et al. 2005, p. 19.
See Rasonyi 2006, p. 23 and Rasonyi 2007, p. 23.
This can also be observed in daily life. Kortmann et al. 2005, for example, find that a high percentage of self-employed individuals is still working at the age of 65 years. See Kortmann et al. 2005, p. 34.
New paths to retirement are emerging. They involve “‘bridge’ jobs and gradual transitions through various labor market stages.” “That is, many older people follow unconventional tracks, some working forever, some gradually winding down on the same job and some finding a ‘bridge’ job to move into at older ages. [...]Gradual labor market withdrawal patterns [...][are appearing as] people may reach retirement age with inadequate saving, and find that they must remain employed to make ends meet.” Mitchell et al. 2000, p. 2f.
This research aims at identifying changes in views, attitudes and behaviors by comparing positions of an individual today and earlier in his life, his position relative to his parents, or just his general views on younger and older members of society. The study was conducted with 60 people aged 40 to 80. See Frick 2005, p. 64ff.
The renowned old-age researcher Paul B. Baltes even spoke about this phase in retirement as the third and fourth life. See Meier-Rust 2006, p. 70.
Therefore, health will not only remain a central theme going forward, but will even increase in importance. This is because not only is being healthy important, but also because health-related expenses will increase. See Frick 2005, p. 80. This can also be seen in the fact that the “new old” generation spends significan more on health than younger generations. See Bosshart et al. 2004, p. 23.
See for example Hunt et al. 2005 or Braun et al. 2002.
See Bernet 2005a, p. 27.
See Frick 2005, p. 16.
Dychtwald 2004, p. 70.
The efforts of the German BMAS to promote further education of older employees, the reintegration of long-term unemployed, as well as the avoidance of early exclusion of older people from the working process, subsumed under the term “Generation Arbeit — Initiative 50plus”, point in this direction. See BMAS 2006a.
See Bernet 2005a, p. 27.
Kienbaum 2001 and Kienbaum 2004 have analyzed the development of salaries in Germany between 2001 and 2004 and shown that they outgrew inflation by 0.2–1.1% p.a. in real terms, depending on the education level and amount of responsibility of an individual. See Kienbaum 2001, p. 32ff and Kienbaum 2004, p. 30ff.
See Eisenberg 2006, p. 35.
See for example, Shim/Siegel 1991, p. 343 or the “Rentenschätzer” from the DIA 2006b. Banks et al. 1998 find a pronounced drop in the standard of living after retirement in the UK which they partially attribute to external shocks. See Banks et al. 1998, p. 769ff.
Reduction in expenses due to changes in labor-market status (e.g., reduced expenses for transportation and clothing). See Reimann 2006, p. 33.
According to Kortmann et al. 2005 90% of male and 82% of female retirees receive statutory pension income in the Alte Bundesländer. Additionally, 46% of men but only 9% of women receive occupational pension income in the Alte Bundesländer. See Kortmann et al. 2005, p. 66ff.
Due to the lower values of bequest that results from the very pronounced consumption attitude of today’s pre-retirees however, the following generation could still be a “Lost Generation” as termed in Bernet 2005a, p. 27.
See Peape 2004, p. 11ff.
See Frick 2005, p. 34, 38.
According to the OECD 2001 historic replacement rates amounted to around 90% relative to the income of people aged 18 and over in Germany in the mid 80s and mid 90s. See OECD 2001, p. 27.
Interviews with Gast 2005 and Fischer 2006. In practice, the concept of risk appetite is used in such a way that wealth is allocated to different wealth pots with different time horizons and different risk appetites, to each of which the appropriate investment strategy is tailored. See e.g., Trachsler 2001, p. 93. Similarly, also Spremann 1999 argues for a distinction of assets into lunch money and smart money according to primary and secondary investment goals. See Spremann 1999, p. 22.
See Tversky 1990, p. 73.
See DAI 2006 that states that 17% of the British population were stockholders in 1992 while in the US the average household had 19% of their assets in stock holdings and a further 10% in mutual funds in 1996 already. The German share for 1996 amounted to 9% and has since increased slightly with a growing importance for the equity mutual funds and a lower share of direct equity holdings. According to Sierminska et al. 2006 the US households exhibit the highest preference for financial assets as around 35% of total assets are held in financial assets, over two thirds of which are held in risky investments such as stocks or mutual funds. See Sierminska et al. 2006, p. 15.
See also Bernet 2005a, p. 28 who suggests leveraging a better integration of the financial-and risk markets in order to create products with such a risk protection.
“If you are retired, you might favor save investments providing fixed yearly returns. Appreciation in the price of a security is not as important as stable, guaranteed income. Risky investments are undesirable due to uncertainty.” Shim/Siegel 1991, p. 233.
Clark et al. 2004 find that “almost half of the women [in their survey]indicated that they were either conservative or moderately conservative investors, as compared to 44% of the men. This finding is consistent with other surveys that report women as more likely to elect lower risk-lower return investment choices than men.” Clark et al. 2004, p. 191. See also Glass/Kilpatrick 1998, p. 611.
Drinkwater/ Sondergeld 2004, p. 282f.
“The primary mortality risk facing people during their working years is dying too soon, a fact that boosts the demand for traditional life-insurance. For retirees, by contrast, the primary mortality risk is dying later than expected, or living longer than financial resources can support people’s desired standard of living. Longevity risk can thus be defined as the possibility that a person will outlive his savings and be forced to reduce his living standard.” Drinkwater/Sondergeld 2004, p. 275.
Additionally Drinkwater/Sondergeld 2004 state that women tend to be less optimistic than men. They also cite a survey in which 11% of the individuals examined had already outlived their earlier determined planning horizon. See Drinkwater/Sondergeld 2004, p. 276. For further research it would be interesting to analyze how many individuals have already outlived their life-expectancy in Germany.
N.N. 2006c, p. 71.
See Drinkwater/Sondergeld 2004, p. 276.
For women, old-age life-expectancy is 84 years, for men 81 years. See C. 15 and STBA 2005c.
Dehm et al. 2000 and Höllger/Sobull 2001 for example have observed the retirement provision of women in Germany and found that those women who have job positions with more responsibility are also more active with regard to financially providing for their retirement.
According to Fischer 2006 client advisors were asked earlier to contact the clients around their 50th birthday with the proposals for retirement provision. Recently however, there has been a tendency to start approaching them earlier with this topic, at the age of 40.
According to Benenni 2006.
AXA 2006a, p. 60.
Since this study focuses on the affluent segment, the individuals in this target group can be assumed to have a higher level of financial sophistication, which in return would lead to the expected start at a younger age. See Kennickell et al. 1997, p. 2.
For example, individuals themselves might feel that their assets are not sufficient to warrant financial planning and on the other hand the advisors might have specifications to focus their efforts on individuals within a specific age group. See age-indications of Wegelin 2006 and the interviews with Fischer 2006 and Benenni 2006 from UBS.
MacFarland et al. 2004, p. 114.
Since these investor types can be considered as more sophisticated, this finding also corresponds to the results of the OECD report on financial literacy, namely that “more financially sophisticated consumers prefer the internet.” OECD 2005, p. 54.
The development that individuals are preparing the transition into retirement and cash-out assets caught in private insurances is also confirmed by DIA 2005d.
As mentioned above, the BVI stated that in 2004 31% of all mutual fund assets were invested in equity and a further 5% in balanced funds. Assuming that balanced funds have on average about a third invested in equity the total proportion of equity investments within mutual funds for Germany amounts to about a third. See Schardt von Barby 2005, p. 86.
See Shim/Siegel 1991, p. 93.
This reflects a key proposition of the behavioral life-cycle hypothesis, namely that drawdown of assets in the dissaving period is slower than predicted by the standard life-cycle hypothesis. See section 4.3.1/Shefrin/Thaler 1988, p. 632.
See CS 2005a, p. 17 and CS 2005b, p. 5. Furthermore, Shim/Siegel 1991 recommend that the ongoing costs for housing should be not more than 35% of take-home pay. See Shim/Siegel 1991, p. 184.
According to the STBA 2003b, Einkommen und Einnahmen sowie Ausgaben privater Haushalte in den Gebietsständen — Deutschland insgesamt, Table UB2, the average income for a German is €2,833 per month.
See Kobliner 2000, p. 42.
Orgland 2006 for example stated that the individual tailoring is precisely the reason for why there is no general rule about the recommended saving rate.
Börsch-Supan et al. 2005 for example use the term “retirement gap” to compare the anticipated level of retirement income after the reforms with the historic level of retirement income analogous to Fig. 3.4. Schnabel 2003b denotes the difference between the pension income of a retired worker and the amount required to keep the actual standard of living as the pension gap.
See BMAS 2006b, p. 97.
See Geis/Bähr 2006, p. 28.
According to the DIA 2005b the official saving rate of the German population has decreased significantly since 1975 when the rate was over 15% but is on the rise again. Compared to the UK with only 5.2% saving rate, the 10.4% of Germany seems quite high. See Peape 2004, p. 5. An interesting point in this regard is that the consumption mentality in Germany can be considered as less pronounced than in other countries such as e.g., the US or UK where the saving rate is much lower and households are accepting a higher indebtedness. See Bernet 2005b, p. 64. However, the comfort from a relatively high saving rate is reduced if the investment strategy is taken into consideration. For example, individuals in both countries, the US and the UK, tend to assume a higher share of equity and thus invest more aggressively, resulting in an increased potential for higher returns.
This means that 50% of all German households have a saving rate below 12%. Numbers relate to 2002. See Börsch-Supan/Essig 2002, p. 49.
The Generation Gold study focuses on individuals aged 40 to 80 living in Germany in spring 2005. Contrary to this study’s target group, the individuals surveyed in the GDI study were not required to belong to the affluent segment. See Frick 2005, p. 66.
See Kobliner 2000, p. 42.
See for example Höllger/Sobull 2001, p. 29ff or Dehm et al. 2000, p. 40ff.
Also Börschsupan/Essig 2002 have found that individuals with poor health show a very pronounced risk aversion with regard to health risk. See Börsch-Supan/Essig 2002, p. 85ff. As a consequence, they would be expected to invest a lot of their assets into the mitigation of the health risk. So if it can be confirmed that these individuals show a high level of health risk mitigation (which indeed can be seen with a mitigation level of the health care risk of 31% versus an average mitigation of only 24%, see Table 6.42), it could well be that these mitigation costs are too high and leave no room for traditional saving.
See Börsch-Supan/Essig 2002, p. 13. Since these authors are looking at a wider range of the population, they find that the groups that save most are individuals aged between 30 and 39 years.
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(2008). Empirical analyses of individual retirement-specific FPB. In: Individual Financial Planning for Retirement. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-1998-4_6
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