Risks in Advanced Age
By Michael A. Guillemette (Texas Tech University)
• This article outlines risks retirees face and possible solutions to help them overcome behavioral hurdles.
• A preference for certainty has been observed in advanced age and older defined contribution investors exhibit equity-varying risk aversion.
• Clients face declining cognitive ability over time, which corresponds with a decrease in investment performance.
• Financial literacy skills decline in advanced age but confidence does not, which may lead to older clients being overconfident in their financial literacy abilities.
• A retirement consumption puzzle has been observed as wealthy individuals do not decumulate portfolio assets efficiently during retirement.
• Wealthy people are living significantly longer than their less wealthy counterparts, creating the need for retirement assets to last for an extended period.
• Longevity annuities are superior to a bond ladder for protecting clients against the tail risk of running out of money prior to death, but there are conflicts of interest within advisor compensation models which may hinder their demand.
• Determinants of the stated demand for longevity annuities are discussed.
Full Content: SSRN
