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Accepted Papers

Accepted Posters

ACCEPTED PAPERS

Dominated Financial Choices by Low-Income Consumers within the Individual Health Insurance Market

Hsu J,
Harvard Medical School

Fung V.
Harvard Medical School

Consumers increasingly are making important financial choices that impact their access to health care. For example, the Affordable Care Act (ACA) expanded health insurance coverage in part through new, state health insurance exchanges through which consumers could choose an insurance plan. By increasing health insurance coverage, the ACA sought to increase access to health care in the United States. Recent and proposed changes to these exchanges have the potential to alter the number of options available to consumer (e.g., plans sold across state lines), complexity of the choices (e.g., changes to subsidies for 2018), and information available to consumers. We conducted interviews in English and Spanish among a random sample of 2,103 adult enrollees in individual market health insurance plans offered in California in 2014. The ACA permitted continued sales of health insurance plans outside of the exchanges, i.e., off-exchange plans, but these plans had to meet the ACA’s minimum standards to be qualified health plans (QHPs). Accordingly, we included enrollees in individual market insurance QHPs offered both on- and off-exchange. The ACA also include funding for exchanges to hire counselors to help consumers choose their plans, but again permitted the continued sales through the pre-ACA channels, e.g., insurance agents or brokers. The majority of enrollees in California’s 2014 individual insurance market had lower levels of income, but many appeared to forfeit available premium and/or cost-sharing assistance by purchasing plans that were ineligible for subsidies. Enrollees who received subsidies perceived their insurance and medical care to be more affordable than those who did not. Those receiving assistance from a Covered California counselor were less likely to forego subsidies, but fewer than one-third of subsidy-eligible enrollees received this assistance.

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Optimal Financial Knowledge and Wealth Inequality

Annamaria Lusardi
The George Washington University and National Bureau of Economic Research

Pierre-Carl Michaud
HEC Montreal and RAND

Olivia S. Mitchell
Wharton School, University of Pennsylvania and National Bureau of Economic Research

We show that financial knowledge is a key determinant of wealth inequality in a stochastic life cycle model with endogenous financial knowledge accumulation, where financial knowledge enables individuals to better allocate lifetime resources in a world of uncertainty and imperfect insurance. Moreover, because of how the US social insurance system works, better-educated individuals have most to gain from investing in financial knowledge. Our parsimonious specification generates substantial wealth inequality relative to a one-asset saving model and one in which returns on wealth depend on portfolio composition alone. We estimate that 30–40 percent of retirement wealth inequality is accounted for by financial knowledge.

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The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment

Cary Frydman
University of Southern California

Baolian Wang
Fordham University

We test whether the salience of information causally affects investor behavior in a high stakes trading environment. Using investor level brokerage data from China and a natural experiment, we estimate the impact of a shock that increased the salience of a stock’s purchase price, but did not change the investor’s information set. We employ a difference-in-differences approach and find that the salience shock causally increased the disposition effect by 17%. We use microdata to document substantial heterogeneity across investors in the treatment effect. We then estimate an investor level proxy for “salient thinking,” and show that this explains the heterogeneity.

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“Alexa, can you plan my retirement?” Cognitive resource depletion and human versus computer-mediated financial planning interactions

Nils Olsen
The George Washington University

Zhuo Jin
The George Washington University

Vanessa G. Perry
The George Washington University

Technology is increasingly relied upon to enhance and sometimes replace human decision making processes. In many cases individuals and organizations will even outsource their decisions to computer and app-based software. For example, an avatar-based financial advisor may provide more efficient and unbiased information; however, the same avatar might also evoke a different set of cognitive and emotional responses than a human advisor (Dagher, 2017). Within this context it is important to note that high levels of cognitive complexity or emotional involvement (e.g. dread, uncertain information) associated with the processing of option-related information can lead to ego-depletion (a.k.a. cognitive resource depletion or CRD). This depletion, in turn, can lower one’s cognitive capacity for developing high quality decisions. The current research will explore the delicate relationship between cognitive resource depletion (CRD) and decision making processes (choice riskiness, preference consistency) when individuals have been exposed to avatar versus human financial planning advisors.

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On Institutional Trading, Behavioral Bias, and Demand for Liquidity

Sugato Chakravarty
Purdue University

Rina Ray
University of Colorado at Denver

Using a large transaction level dataset, we find that institutional investors make economically insignificant -4 to 9 basis points net profit on their portfolio of buy—sell transactions over 1-day to 4-week holding period. The negative net profit comes exclusively from trades with 1-day holding period. We find no evidence of overconfidence, biased self-attribution, or disposition effect among institutional investors. Pension fund managers outperform money managers. Institutions engage in short-term trades despite earning net zero return for liquidity, tax-minimization, risk-management, and window-dressing reasons. Among these non-profit maximizing rational motives for trading, liquidity trading motive is the strongest.

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The Age and Gender Effects on a Conceptual Framework of Household Financial Help-Seeking Behavior

Lu Fan
University of Missouri

Swarn Chatterjee
University of Georgia

This study aims to establish a consumer financial decision framework of financial help-seeking behavior to analyze multiple information sources that households rely on to make complicated financial decisions. The influential factors and positive and negative outcomes of seeking professional help and financial advice are included in the framework. This study uses the 2012 National Financial Capability Study dataset and structural equation modeling methodology to examine the relationships among information sources, help-seeking behavior, and behavioral outcomes. Results of this study suggest that: 1) seeking financial advice was positively associated with desired financial outcomes and negatively associated with risky financial outcomes; 2) the financial help-seeking behavior mediated the relationships between internal, external information sources and financial behavioral outcomes; and 3) the influence of financial help-seeking varied by gender and age groups. The findings from this study provide practical implications for financial professionals when counseling and communicating with clients.   

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Interactions between human and statistical decision makers: A review with implications for automated planning

Jason S. McCarley
Oregon State University

Statistical models and automated decision aids outperform humans in many probabilistic decision tasks. Despite this, human decision makers prefer to rely on their own judgments, or those of other humans, rather than those of a statistical decision aid. As a result, aided decisions are highly suboptimal, even when the human decision maker is aware that the aid is more reliable and loses money by not deferring to its judgment. Disuse of statistical aids results in part from a loss of trust that results when the expectation of perfect performance is violated. These effects suggest that automated financial planners may be distrusted and disused if they occasionally behave in a way users find flawed or questionable. Trust in planning aids is likely to be most robust if the aids are transparent: users should understand how the aids operate and why they might occasionally make imperfect judgments.

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The Effect of Familiarity with Foreign Markets on Institutional Investors’ Performance

Mark Fedenia
University of Wisconsin

Hilla Skiba
Colorado State University

Tatyana Sokolykl
Brock University

Empirical studies document that investors typically deviate significantly from a globally market value weighted portfolio, concentrating their portfolio holdings in securities domiciled in their home country and in familiar foreign markets. Evidence that home country concentration stems from an information advantage is mounting, but it is not known whether investors’ foreign portfolio concentration extends the local market information advantage to familiar foreign markets. Using a comprehensive sample of foreign portfolio allocations of institutional investors, we identify a familiarity effect where, on average, investors achieve higher risk-adjusted returns in familiar foreign markets. The familiarity effect depends on investor skill. According to our investor skill metric, high skill investors outperform low skill investors; and low skill investor performance suffers especially in unfamiliar foreign markets. These new findings on better performance outcomes in familiar foreign markets suggest that investors have an information advantage that is rationally exploited in familiar foreign markets.

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Drawing Down Retirement Savings – Do Pensions, Taxes and Government Transfers Matter Much for Optimal Decisions?

Bonnie-Jeanne MacDonald
Ryerson University – The National Institute of Aging (NIA)

Richard J Morrison
Independent

Avery, Marvin
Human Resources and Skills Development (HRSD), Retired

Lars S. Osberg
Dalhousie University – Department of Economics

This paper examines the importance of pensions (employment and social security), taxes and government transfers for alternative retirement savings drawdown strategies, based on Canadian evidence. Using as examples single elderly Canadians at the 10th, median and 90th percentiles of the income distribution, we use a lifetime utility framework to evaluate an illustrative set of six popular drawdown strategies. Our longitudinal dynamic micro-simulation model for Canada incorporates risk aversion, stochastic markets, stochastic mortality and the interactions among sources of retirement income within the complex Canadian tax and social benefit system, enabling us to rank six commonly advocated drawdown strategies and to ask whether incorporating pensions, taxes and transfers alters those rankings. Our primary finding is that consideration of pensions, taxes and transfers does often alter the rankings of drawdown strategies for retirement savings. Notably, and contrary to nearly all the research on this topic, annuitization is not always the best strategy once pensions, taxes and government transfers are modeled. Second, including consideration of pensions, taxes and transfers differentially alters the ranking of drawdown strategies – the effects are not uniform between males and females, across people at different points in the income distribution, and at different levels of risk aversion. Last, the drawdown strategy choice can be very important to the retirement financial welfare of some seniors, and nearly inconsequential for others – an issue ignored when only the drawdown of savings alone is considered. Our findings show the importance of treating the evaluation of alternative drawdown strategies as a comprehensive and integrated problem by including all sources of income – including pensions, taxes and government transfers. Using restricted measures risks leading to simplistic, and possibly misleading, conclusions.   

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Consumption, Debt, and Delinquency Responses to an Anticipated Increase in Cash-on-Hand

Philippe F. d’Astrous
HEC Montreal – Department of Finance

I use account-level bank data to analyze consumers’ responses to the anticipated increase in cash-on-hand following the final payment on a term loan. Financial constraints are elicited from past credit card payment behavior and can rationalize credit card but not term loan responses: contrary to predictions, unconstrained consumers are 23% more likely to finance new durable goods with term loans after the original loan is paid off. Default probability decreases, showing consumers use financial delinquency as an adjustment margin and highlighting the bank’s trade-off between credit granting and write-off probability.

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Charitable, Religious, and Family Estate Planning Attitudes among African-Americans

Jennifer Lehman
Texas Tech University, College of Human Sciences, Department of Personal Financial Planning, Students

This study explores both whether lifetime religious giving tendencies extend to religious estate giving attitudes and whether underlying charitable estate giving attitudes, rather than documentation, may serve as the key barrier to charitable estate planning. Data from the Panel Study of Income Dynamics indicates that, as compared with others, African-Americans attribute significantly higher importance to religious bequest gifts in absolute terms, relative to importance of family bequest gifts, and relative to importance of other charitable bequest gifts. African-Americans also attribute greater importance to charitable bequests in absolute terms, but a lower importance to such gifts when measured relative to the importance of leaving a bequest gift to family. These results suggest that the preference for lifetime religious giving extends to estate giving attitudes. Further, the results indicate that lack of underlying charitable intent (especially for religious giving) does not explain the relative lack of charitable estate planning, leaving open the possibility that documentation may be the key barrier.

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Are Separately Managed Accounts Efficient Investments? A Comparison Study with ETFs

Yuanshan Cheng
Winthrop University

Harold Evensky
Texas Tech University

Tao Guo
William Paterson University

Xianwu Zhang
Texas Tech University

Separately managed accounts (SMAs) and collective investment trusts (CITs) are increasingly popular among institutional investors and households with high wealth level. While the SMA market asset in domestic equity has more than doubled since 2000, studies on SMA are very limited. Early studies (Peterson et al., 2011; Elton et al., 2013) provide evidence that the performance of SMAs is similar to that of index funds. Some researchers (Donaldson, 2005) suggest that SMA investors pay a high premium for these additional features in the form of higher expenses and under-diversification. In this paper, we studied the expense and performance of equity SMAs and CITs (Combined separate accounts, hereafter) and compared those to that of the Exchange Traded Funds (ETFs), which are widely used by institutions and individual investors. First, we found that combined separate accounts in general charge much higher expenses than their ETF counterparts. Second, separate accounts do not consistently outperform ETFs in terms of gross return quintile and net return quintile comparison. SMAs outperform ETFs in large cap market but underperform ETFs in mid cap and small cap markets. However, SMAs consistently outperform ETFs in terms of risk-adjusted return across nine styles. We also found that even though the performances do not persistent within SMAs, but over time SMAs still can deliver a better risk-adjusted alpha as compared with ETFs, especially in low percentiles. Third, by looking at self-reported tax strategies from investment companies, we found no significant evidence that tax is proactively managed within SMAs. We also studied the trend of new SMAs and CITs. We observed that newly created separate accounts usually have lower minimum investment requirement as compared with existing ones. However, those funds with lower minimum investment requirements also have lower risk-adjusted performances. Imposing SMA Managers to the fiduciary standards and additional regulations could be necessary, as decreasing minimum investment requirement potentially expose more investors to this unregulated market.

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Income Portfolios and Liability-Driven Investing

Thomas Idzorek
Ibbotson Associates – A Morningstar Company

David M. Blanchett
Morningstar Investment Management LLC

Liability-driven investing (LDI) – in particular liability-relative optimization – represents a fundamental improvement over more common asset-only portfolio optimization techniques, such as mean-variance optimization. By considering liability characteristics when setting the asset allocation, LDI techniques take advantage of the natural hedging quality of certain investments. Well-meaning practitioners have begun embracing LDI techniques when building portfolios for individual investors (especially retirees) without considering the unique characteristics of the individual’s liability or the risk attributes of the assets or cash flows retirees have available to fund the liability (e.g., Social Security retirement benefits). The result is highly conservative portfolios like those used by institutional investors. But these investors tend to have more predictable liabilities, with idiosyncratic risks leveling out across a large population of retirees. Individual investors, who must endure greater idiosyncratic risk in their retirement spending needs, must also invest appropriately to hedge these risk in an LDI context. We find that most investors at or near retirement are likely better served with less conservative, more balanced, and more diversified portfolios that recognize the increased duration associated with living longer.   

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Borrower Heterogeneity and the (Ir)Rational Demand for Short-Term Credit

David M. Becker, David M.
University of Mannheim – Department of Banking and Finance

Lena Jaroszek
Copenhagen Business School – Department of Finance

Martin Weber
University of Mannheim – Department of Banking and Finance

Short-term credit serves bridging short-term liquidity gaps. Instead, short-term credit is often used over an extended period of time. Such behavior could stem from individuals’ preference for immediate consumption. We thus analyze, whether short-term credit usage, specifically overdraft usage, is related to time preferences. Combining bank account data with survey responses provides us with evidence that individuals with higher implied discount rates use overdrafts more frequently. We disentangle a normative and a behavioral explanation. Our results are consistent with the existence of self-control problems in the form of present-biased time preferences.

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Responses to Saving Commitments: Evidence from Mortgage Run-Offs

Steffen Andersen
Copenhagen Business School – Department of Finance

Philippe F. d’Astous
HEC Montreal – Department of Finance

Jimmy Martinez-Correa
Copenhagen Business School

Stephen H. Shore
Georgia State University

We study how individuals respond to the removal of a saving constraint. Mortgage run-offs predictably relax a saving constraint for borrowers who chose mortgage contracts that committed them to effectively save by paying down mortgage principal. Using the universe the Danish populations we identify individuals whose mortgages were on track to run off between 1995 and 2014. We use mortgage runoffs to understand the importance of relaxing a saving constraint on wealth, leisure, consumption, saving, and investment decisions – as well as the mechanism individuals use to circumvent the saving constraint. We find that on average, borrowers use 39 percent of the resources previously devoted to mortgage payments to decrease labor income, and use 53 percent to pay down other debts. The labor supply response is limited to those without substantial assets or debts prior to the run-off, while the debt reduction response is limited to (and one-for-one among) those without substantial assets but with other debt prior to the run-off. We find no statistically significant results for wealth accumulation in bank deposits, stocks, or bonds.

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Household Financial Planning Strategies for Managing Longevity Risk

Vickie L. Bajtelsmit
Colorado State University, Fort Collins

Tianyang Wang
Colorado State University – Department of Finance & Real Estate

This study examines how longevity risk, in conjunction with other post-retirement risks, impacts retirement consumption decisions and retirement wealth needs. We examine the relationship between longevity risk and consumption/savings theoretically, and then empirically test the theoretical implications by simulating retirement outcomes for representative households, including longevity, inflation, investment, health, and long-term care risks. Retirement wealth needed by the longest-lived households is approximately 20% higher than for those who live only an average lifespan. Investigations of various risk mitigation strategies suggest that combination strategies, particularly those that include delayed retirement, can significantly reduce the retirement wealth target.

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When Couples Spar Over Money: Financial Advisers as Mediators

Werner F. DeBondt
DePaul University – Driehaus Center for Behavioral Finance

Auke Plantinga
University of Groningen

Love and money can be an explosive mix, and financial planning may save couples all sorts of headaches, especially for major financial decisions that affect the family as a whole. Prudent judgment may be achieved with the out-side help of professional financial advisors. Top advisors are mediators as well as investment, tax, estate and legal experts. We study the effect of advisors on saving and investment decisions and family budgeting with panel data from the DNB (De Nederlandsche Bank) Household Survey in The Netherlands (1993-2015). Nearly a quarter of Dutch families list professional advisors as their most important source of information about finance. Standard finance theory pays little or no attention to cooperation and conflict within the family. However, over the past few decades, family structures in the Western world have been radically altered, and this evolution contributes to what many consider a savings and retirement income crisis. We examine the behavior, self-declared beliefs and motivations of individual agents within family units. Our study documents pertinent time-series and cross-sectional patterns in the saving and investment behavior of single- and multi-adult Dutch households, male- or female-headed, with or without children, young or old, rich or poor. Importantly, we focus on opinions gaps and disagreements between spouses. To what extent do spouses think alike? Does diversity of opinion narrow or widen over time? How does outside ad-vice offered by friends, remote family members and professionals influence household decisions? Most crucially, do professional advisors, serving both as mentors and mediators, counteract some of the confusion and disarray caused by household partners with contradictory or incompatible money personalities? Our analysis employs structural equation modeling and is based upon tens of thousands of data points collected over more than 20 years.  

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Behavioral and Non-Behavioral Factors Affecting Will and Trust Ownership

Zhikun Liu
Texas Tech University

Russell N. James, Russell N.
Texas Tech University

The propensity for older adults to have estate planning documents has been declining noticeably in recent years, such that a majority of adults age 50 and over now have no will or trust documents. This study investigates factors associated with usage of will or trust documents. After reviewing the previous literature regarding factors associated with will and trust adoption, this paper explores these and a new behavioral factor that may provide insight into this decision-making process. First, the impact of hyperbolic discounting on estate planning decisions is analyzed cross-sectionally using the 2014 HRS (Health and Retirement Study) survey. The results indicate that among older adults (age 50 or above), those who have relatively longer financial planning horizons are more likely to have a valid will or trust, controlling for demographic, wealth, health, retirement, and education factors. People who demonstrate high future-discounting may tend to procrastinate will and trust adoption despite the need to do so. Next, a longitudinal analysis using all available waves of the 1998 to 2014 HRS data is conducted to expand our knowledge of changes over time within the same people that result in the adoption of estate planning documents. The insight gained can help financial advisors and counselors to encourage this important, and increasingly rare, financial planning activity.

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Feeling Rich: Disposable Income and Investor Rationality in the Market for Mutual Funds

Swasti Gupta-Mukherjee, Swasti
Loyola University Chicago – Department of Finance

This study shows that the representative investor’s rationality and sophistication in the market for mutual funds has a predictable and significant relationship with changes in disposable income in the economy. I show that aggregate flows to actively managed funds relative to passively managed funds increase with the growth in disposable income, where active funds are more expensive and typically underperform passive funds. The representative investor’s sensitivity to the price of retail S&P 500 index funds significantly decreases with the recent growth in disposable income. The representative investor shows inferior fund selection ability among S&P 500 index funds by driving higher flows to worse future performers in periods with high growth in disposable income, but superior ability in other periods. There is evidence that fund sponsors offer lower quality mutual fund products in periods with high growth in disposable income, where new index funds entering the market in these periods charge higher fees and underperform post-inception. Investor choices among comparable actively managed funds reveal similar results. Taken together, the evidence is consistent with the market for mutual funds consisting of informed as well as uninformed investors. Further, the influence of uninformed investors is more pronounced in periods when they “feel rich”, leading to distortions in the rational relationships between price, performance, and asset flows into mutual funds. 

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Do as I Say, Not as I Do: An Analysis of Portfolio Development Recommendations Made by Financial Advisors

John E. Grable
University of Georgia

Amy Hubble
University of Georgia

Michelle Kruger
University of Georgia – College of Family and Consumer Sciences, Students

 This paper describes how financial advisors rank, weigh, and use client characteristics and portfolio development factors when making an asset allocation recommendation. It was determined that in a scenario free context, a client’s time horizon was the top ranked portfolio development factor. Findings also showed that financial advisors alter the importance of certain factors when working with clients of differing ages and employment status. Additionally, results showed that financial advisors are somewhat inconsistent in their use of portfolio development factors across client scenarios. Finally, findings indicated that older financial advisors with more experience do a better job of matching asset allocation recommendations to normative portfolio guidelines as described in mean-variance optimization models.  

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Improved Inferences in Fund Performance Evaluation Using Time-Varying Fund Alphas and Betas: A Nonparametric Approach

Biqing Cai
Huazhong University of Science and Technology

Tingting Cheng
Nankai University – School of Finance

Cheng Yan
Durham University – Department of Economics and Finance

We develop a nonparametric methodology for estimating and testing time-varying fund alphas and betas as well as their long-run counterparts: the time-series averages of time-varying fund alphas and betas, respectively. Traditional approaches arise as special cases without enough time variations. Our methodology performs well in various cases of simulations. Applying our methodology to both individual ‘star’ funds such as Fidelity Magellan fund, the whole mutual fund and hedge fund industry, we uncover some new findings regarding several fund performance controversies. Combining our methodology with the bootstrap approach to control for ‘luck’ in time dimension, we reject the zero long-run alpha null for the mutual funds but not the hedge funds albeit substantial time variations.

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A Study on Influence of Financial Cognition on Personal Financial Planning of Indian Households

Mousumi S. Mahapatra
National Institute of Technology

Anupam De
NIT Durgapur

Jayasree Raveendran
TCS Innovation Labs

The term financial planning has been an area of research interest since few years. Studies have underlined the influence of various cognitive factors in individuals’ financial decisions. The present study is also trying to underline the influence of various cognitive factors in personal financial planning of Indian households. The term financial cognition considered three components namely financial attitude, risk attitude and financial knowledge and raise the concern about the influence of various cognitive factors on individual personal financial planning. Especially in India, being a conservative attitude towards financial decisions, individual households do have higher influence of various cognitive and behavioral aspects in their suboptimal decision towards personal financial planning. The present study is putting forward those aspects of personal financial planning decisions of Indian households. The main objective of the model is to create the bare minimum structure to demonstrate the influence of financial cognition on personal financial planning among Indian households. The study mainly tried to explore the fundamental principle of subjective thinking towards financial decision. The model would represent the influence of financial cognition towards people financial decisions and can be helpful in exploring the financial information process. The study used PLS-SEM to explore PFP process in all the area of financial interest i.e. cash flow management, investment, insurance, retirement, tax and estate planning. The salaried individuals from different sectors are considered as sample for the study. The analysis has been done with 452 responses from Indian households.  

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Influence of Future Orientation on Household Leverage in the Netherlands

David A. Ammerman
West Texas A&M University

Maurice MacDonald
Kansas State Personal Financial Planning

Debt management is a primary concern for households and financial planners across the globe. Yet, for being of such importance, relatively little is known about the way household leverage is determined. This study adds to the literature by exploring the influence of future orientation on household debt. This study utilizes a sample of households extracted from De Nederlandsche Bank Household Survey and Ordinary Least Squares regression to model the natural logarithm of household debt, controlling for the household financial respondent’s future orientation, household assets, and other factors. Consistent with theoretical predictions, future orientation had a negative influence on household debt, all else equal. Implications for practice and directions for future research are discussed.  

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The Impact of Shared Decision-Making on Overconfidence: The Financial Planning Challenge and Opportunity

Dee Warmath
University of Wisconsin-Madison

Dominik M. Piehlmaier
University of Wisconsin – Madison, Students

Cliff A. Robb
University of Alabama

There are numerous reasons why clients might turn to a professional advisor to answer certain financial questions or construct a plan, and in many cases, the process of developing a plan to meet a client’s need may be straightforward. In some instances, however, a properly structured financial plan may fail due to poor execution or lack of follow through on the client’s end. Numerous factors can lead to a disconnect between plan design and plan execution (some of which can certainly come from the planner side of the equation), but one challenge of particular interest that financial planners face is clients’ overconfidence. The goal of this study is to examine the role of shared financial decision-making in the household in reducing client overconfidence and the ability of a focus on desired end states to explain this relationship. We leverage a robust data source collected by the Financial Industry Regulatory Authority (FINRA) during the 2015 National Financial Capability Study (NFCS) in which they gathered responses from 2,000 individual investors who hold accounts beyond the IRA or 401(k).  

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Late-Life Disability, Homeownership, Wealth and Mortality

Patryk Babiarz
University of Alabama – Department of Consumer Sciences

Tansel Yilmazer
Ohio State University

This paper uses data from the Health and Retirement Study to investigate when the older homeowners suffering from late-life disability exit from homeownership and how this exit influences their total wealth and mortality. Findings from estimations that control for individual fixed effects show that older households continue to be homeowners unless they need assistance with five or more activities of daily life. On the other hand, those needing help with two or more instrumental activities of daily life leave homeownership. When older adults with late-life disability exit homeownership, they do not experience any increases in financial or non-housing assets. Mortality among households needing assistance with instrumental activities of daily life is lower for those who exit homeownership relative to those who keep their homes.

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Framing Longevity Income

Michael A. Guillemette
Texas Tech University – Department of Personal Financial Planning

Jesse B. Jurgenson
Iowa State University – Iowa State University, Students

Deanna L. Sharpe, Deanna L.
University of Missouri at Columbia

Xianwu Zhang
Texas Tech University

This paper analyzes the effect of framing on the stated demand for longevity income products. We test whether longevity income framed as “insurance” is more attractive than longevity income framed as an “annuity,” since pure life longevity income is consumption protection. In a sample of 1,425 respondents, we find that when longevity “insurance” is shown before a longevity “annuity” that respondents are less likely to state a demand for a longevity “annuity.” In addition, we identify characteristics of respondents who are more likely to succumb to longevity annuity framing effects. Implications for financial planners and annuity providers are discussed.

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If You “Get Me,” I’ll hire you: Role of Empathy in Black Consumers’ Choice to Use a Financial Advisor

Danielle D. Winchester
North Carolina Agricultural and Technical State University

Roland L. Leak
North Carolina Agricultural and Technical State University

This study investigates if perceived empathy derived from a financial advisor’s ethnicity (i.e., White vs. Black) affects the willingness of Black consumers to seek financial advice. Secondarily, this study incorporates any moderating effects a participant’s racial colorblindness may have on the relationship between empathy and likelihood of using a given financial advisor. It finds that Black consumers view Black advisors, regardless of phenotype, as more empathetic and are more likely to utilize their services.

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A Comparison Study of Retirement Income Bucket Strategies

Yuanshan Cheng
Winthrop University

Tao Guo
William Paterson University

Harold Evensky
Texas Tech University

Bucket strategies have been widely used in financial planning and wealth management industry as a retirement income management tool. Yet the actual implementation of bucket strategies varies significantly among practitioners. There is no well-established guidelines on how to apply these strategies and current literature on the comparative performance of bucket strategies is divided. This study adds to current literature by comparing the systematic withdraw and three major types of bucket strategies that are documented in the literature: cash flow reserve bucket (CFR) proposed by Pfeiffer et al. (2013), time bucket strategy documented by Morgan Stanley (2010) and goal-based bucket strategy documented by Merrill Lynch (2009). We are the first to study the comparative performance in terms of sustainable spending amount, portfolio ending balance, sensitivity to sequence risk, tolerance of transaction cost and consequence of investor over-reaction. We are also the first to quantify the behavioral benefit of bucket strategy. We find that systematic withdraw strategy, even though very simple, provides relatively higher plan success rate and portfolio balance at the end of plan. Time bucket strategy provides the highest sustainable retirement spending and portfolio end balance because of its high equity concentration. Interestingly, time bucket strategy also provides the lowest deficit amount among all the strategies at the worst scenarios, suggesting superior ability to handle tail risk. Cash bucket strategy underperforms systematic withdraw strategy possibly due to the opportunity cost of placing one-year worth of spending in cash. However, its comparative performance significantly improves when we modify the strategy to better preserve assets during bad market and when assumed transaction cost per reposition increases. Cash bucket strategy creates a mental buffer and help clients avoid emotional investment decisions in the down market. On the other hand, clients under systematic withdraw strategy is more likely to over-react in the down market. Our simulation results show that in the case where client bails out after a negative 15% quarterly return, his sustainable monthly retirement spending could be reduced by about $2,000. In short, cash bucket strategy is able to provide at least comparable financial outcomes while provides additional behavior benefit, while time bucket strategy provides the best financial outcomes at cost of behavior concern at the late stage of the plan. Implementation of these strategies demands careful consideration of clients’ preference and behavior traits, transaction cost and risk management.  

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Spending, Relationship Quality, and Life Satisfaction in Retirement

Michael S. Finke
The American College

Nhat Ho
Eastern New Mexico University

Sandra J. Huston
Texas Tech University

Prior economic research has focused on the relation between money and well-being, rather than how resources are used to elicit life satisfaction in retirement. Using Satisfaction with Life Scale (SWLS) along with data from the Health Retirement Study (HRS), this research explores how spending and relationship quality contribute to life satisfaction in retirement, controlling for financial and human capital factors. The results provide evidence to suggest that leisure spending, health status, and spousal and friend relationships have the greatest impact on creating life satisfaction during retirement, while other type of spending and children relationships do not. 

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Financial Self-Efficacy and the Financial Satisfaction of Credit-Card Users

Patrick M. Payne
Western Carolina University – College of Business

Sarah Asebedo
Texas Tech University

This study tests whether an individual’s sense of financial self-efficacy mitigates the effects of credit-card mismanagement on users’ financial satisfaction. We first replicate the results of a previous study of credit-card usage and risk tolerance and find that credit-card mismanagement is associated with lower financial satisfaction for only borrowers with low risk tolerance. We then use data from the Health and Retirement Study and find that credit-card mismanagement reduces the financial satisfaction of borrowers with lower financial self-efficacy only. These results also demonstrate the usefulness of FSE as a predictor of borrower behavior, and reinforce the theoretic connection between FSE and individual risk preferences.

ACCEPTED POSTERS

Financial Planning for Health Care Expenditures in Retirement

Hocutt, Lance
Texas Tech University, College of Human Sciences, Department of Personal Financial Planning, Students

Hilton, Curry W.
University of Alabama, Culverhouse College of Commerce & Business Administration, Department of Information Systems, Statistics, and Management Science, Students

It is widely accepted that financial planning for retirement is deemed wise and essential to maintain an equally sound financial quality of life post-career. However, retirement health care planning and long-term care planning do not receive similar accolade. A comprehensive financial plan should not only include a path to wealth strategies, it should also account for the potential expenses related to health care coverage and long-term care coverage. This paper posits that the likelihood of an individual who has considered retirement health care planning or considered long-term care planning increases when receiving financial advice from a professional financial planner. Such findings are confirmed by means of a robust survey study encompassing a representative sample.

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What is Reality? A Look at How Subjective Perceptions of Financial Wellness Compare to Objective Measures for Older Americans

Tenney, Jacob
Texas Tech University – Department of Personal Financial Planning

Kalenkoski, Charlene M.
Texas Tech University

Financial well-being is likely a factor in many individuals’ utility function. Financial wellness can be measured using objective measures as well as subjective perceptions. In this study, objective measures are compared to subjective perceptions to see if there is a relationship between the two. Three financial ratios, including the liquidity ratio, the debt-to-asset ratio, and the investment ratio, are used as objective measures of financial wellness. Subjective perceptions are measured by a question in the Health and Retirement Study that asks respondents how satisfied they are with their present financial condition. The findings in this analysis suggest that as the investment ratio increases financial satisfaction increases. Financial planners should closely monitor their clients’ investment ratio to help clients plan for future financial goals. There is also a statistically significant improvement in perceptions of financial wellness with increases in the liquidity ratio; however, the increase is small and lacks economic significance.

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What Are the U.S. Retirement Population Comprehensive Assets’ Success Rates?

Chien, Chia-Li
Ball State University, Miller College of Business, Department of Finance and Insurance

This dissertation comparatively investigates the success rates of comprehensive assets of the U.S. retirement population, assuming retirees live to age 100. The essential study method simulates (a) retirement withdrawal with or without retirement strategies from various households’ assets and (b) by age 100 if there are any assets remaining. Census Bureau’s 2008 Survey of Income and Program Participation Wave 8, 9, 10 and 11 or calendar year 2011 represents the U.S. population. The study compares the comprehensive assets’ success rates by demographic characteristics and socioeconomic cohort groups. Some of the preliminary findings are as follows: (a) the weighted population average comprehensive assets’ success rates when using social capital, rental real estate, and financial portfolio assets are 28.74% for couples and 15.88% for singles households. (b) The highest comprehensive assets’ success rates are in the state of Utah for couples and Hawaii for singles; the worst assets success rates are in the state of Alabama for both couples and singles. A large portion of the sample population needs to consider alternative living arrangements or downsizing living expenses. Survival planning is critical to ensure continuous retirement success when a household status changes to single.

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Financial Decision Power and Household Wealth: The Role of Personality and Cognitive Ability

Xu, Yilan
University of Illinois at Urbana-Champaign

Yao, Rui
University of Missouri

This paper studies the how financial decision power is allocated within a household and how it is related to wealth production. Evidence from the Health and Retirement Study (HRS) shows that both the absolute and relative values of husband’s and wife’s personality and cognitive ability predict financial decision power allocation. This is in line with a view of comparative advantage in that whoever has the suitable characteristics for financial decision-making that facilitates wealth production should assume the responsibility. In addition, personality and cognitive ability predict household wealth based on financial decision power role and gender. Inefficient financial decision-making power allocation decreases wealth especially financial wealth, indicating the importance of choosing a person with suitable endowments for financial wealth management.

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Time and Chance: Understanding the Importance of Risk for Financial Planning

MacDonald, Bonnie-Jeanne
Ryerson University – The National Institute of Aging (NIA)

Morrison, Richard J.
Independent

Avery, Marvin
Human Resources and Skills Development (HRSD), Retired

Financial planners and actuaries regularly identify sources of risk relevant for financial planning, including labour market risk, investment returns risk, inflation risk, as well as the risks of disability and living ‘too long’ in the sense of outliving one’s financial resources. The relatively long time spans inherent in individual financial strategies offer significant opportunity for these risks to generate significant, interacting, cumulative impacts on the financial outcomes that people will experience. The proposed project employs computer microsimulation modeling to understand and assess the risks associated with financial strategies. First, we measure the risks in terms of the dispersion of outcomes associated with them. We do this by exploring the degree to which the introduction of risk affects the mean and median outcomes that one can expect from a financial strategy. We next investigate the relative contribution of each source of risk to the general uncertainty of the outcomes. This second investigation is intended to provide an indication of which sources of risk should be modelled in financial planning and the degree of sophistication to be used in modeling them. A final contribution of the proposed project addresses the capacity of individuals to improve financial outcomes and reduce overall risk by adjusting, throughout their lifetimes, those factors that they can control, e.g., savings and drawdown rates, date of retirement, and investment strategy.   

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Who Is Using Robo Advisory Services – And Who Is Not?

Fulk, Martha
University of Georgia

Watkins, Kimberly
University of Georgia

Kruger, Michelle
University of Georgia

The purpose of this study was to compare the demographic, attitudinal, and behavioral characteristics of US consumers in their current and expected use of robo-advisory services, traditional financial planning services, and a combination of the two services. Findings showed a difference between those who used robo-advisory services and those who used financial planners. Overall, those who used a financial planner had the highest net worth, while users of robo-advisors had the lowest net worth. Those who used or plan to use a financial planner were also older. In addition, those who used a financial planner reported a larger percent of their total net worth from an inheritance, whereas the lowest percent of net worth from an inheritance was reported by robo-advisor users. In general, results showed that users of robo-services have lower income, lower net worth, less received inheritance, and are financially less impulsive.  

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How Negative Screening According to Christian Principles Influence Stock Returns

Enete, Shane
Biola University

Kiss, Elizabeth
Kansas State University

Socially responsible investing (SRI) has grown to represent approximately one quarter of all managed assets in the world. Given this scale, it is important to understand the financial implications when financial planners offer an SRI product to a client. One of the biggest questions to ask is: does adding non-financial criteria to the investment process help or hurt risk-adjusted returns? While most academic studies in the past have compared all SRI funds to unrestricted funds, this has been problematic because of the heterogeneous nature of SRI funds. This study will narrow the focus to Evangelical, Charismatic and Pentecostal Christians (approximately 870 million people in the world). This sample group has the potential to request a portfolio that includes a negative screen for certain moral criteria consistent with fundamental Biblical principles. If these Christian investors were to restrict their portfolios (i.e., engage in negative screening) according to fundamental Biblical principles, would the resulting restricted portfolio have risk-adjusted returns that are significantly different than an unrestricted portfolio? Modern portfolio theory (MPT) argues for an underperformance hypothesis, since restricting an investment universe because of individual preferences will necessarily reduce diversification efficiencies. Stakeholder theory has the potential to argue for an outperformance hypothesis, since Christians believe that screening out certain corporate behaviors will lead to a portfolio that avoids companies that will have higher costs, lower revenue, and decreased human capital because of their un-Biblical behavior.  This study will test 7 moral criteria that are consistent with fundamental Biblical principles: abortion, alcohol, entertainment, gambling, LGBTQ lobbying, human rights, and tobacco. The mapping of the 7 criteria to the investable universe has been conducted by the screening service, Evalueator. Evalueator carefully proscribes to fundamental Biblical principles within each moral criterion. Each Biblical principle will be tested using the Carhart 4 factor model to determine the potential cost, or benefit, when using each ethical negative screen. This study will also test whether risk-adjusted returns have a curvilinear relationship relative to screening intensity (which has been shown in other SRI studies of ethical screens). In addition, this study will test whether results are significantly different before-and-after the global financial crisis of 2008. This will be an important study for financial planners as more and more clients seek to incorporate their Christian values into their investment portfolios. Full transparency of potential costs and benefits is greatly needed for the financial planner to be able to discern the best solution for their client.  

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Who Uses Fintech Financial Services and What Influences Their Decisions to Adopt New Financial Services Technologies

Killins, Robert
Seneca College

Harris, John
Seneca College

This research focuses on the financial consumer population and outlines the evolving financial technology (FinTech) product landscape that is disrupting the traditional financial services industry. FinTech products have put traditional financial services firms in a state of renewed competition that has driven a new entrepreneurial spirit in the sector that has typically been slow to remodel profitable consumer based products and services. Robo-advising and online lending platforms are two innovative services that have used computing power to relieve the burdensome paperwork process and provide debt and investing services at a reduced cost while maintaining a satisfactory consumer experience. Not all financial services consumers are ready to adopt these new FinTech products. This research will provide additional insight into what type of consumers may and may not be willing to move into this new financial services landscape. Using a survey capturing the intention to adopt four different FinTech services, which include robo-advising, mobile payments, lending platforms, and alternative currencies, we intend to provide an understanding of what motivates or discourages consumers in their willingness to use such products. Technology acceptance models (TAM) have been developed and are successful in predicting technology adoption and use in the past by Davis (1989), Adams, Nelson, & Todd (1992), and Venkatesh & Morris (2000). We rely on the Risky Technology Adoption Model (RTA) developed by Gupta and Xu (2010) that suggests technology risk and safety awareness both directly affect the security concerns and the adoption intention of risky technologies. Trust is also a key element found in the literature that impacts the adoption and use of financial technologies (Dimitriadis and Kyrezis, 2008). Adding two additional constructs that play a role in determining consumer’s participation rates in financial markets, financial literacy and risk profile, we put forth the following model to evaluate one’s adoption intention of FinTech products.

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How Can We Know Our Clients’ Financial Stress?

Heo, Wookjae
South Dakota State University

Cho, Soo H.
California State University

Lee, Phil S.
South Dakota State University

This study introduced a new, multidimensional financial stress scale and its relevance with clients’ personalities. It is a combined process of financial stressors and financial behavioral responses that includes psychological and physiological reactions. In addition, these reactions can be observed in diverse dimensions, including social relationships, and psychological and physiological responses. By understanding the complexity of financial stress, financial planners can adopt a more professional attitude with their clients. Four possible clusters of clients were demonstrated based on their level of financial stress and personality. Financial planners who are aware of these four clusters can identify their clients’ level of financial stress based on observations of their personalities. This will help planners tailor their services and approaches to clients’ individual differences, and enable them to assess the level of financial stress both directly and indirectly.

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Financial Literacy and Financial Decisions of Millennials in the United States

Kim, Kyoung Tae
University of Alabama

Anderson, Somer G.
Maryville University

Seay, Martin C.
Kansas State University

This study investigated the role of financial literacy in various short-term and long-term financial decisions among Millennials in the United States. Results from the 2015 National Financial Capability Study (NFCS) indicate that Millennials had lower levels of objective financial knowledge and higher levels of subjective financial knowledge as compared to older households. Consistent multivariate results found financial literacy to be positively associated with performing positive short-term and long-term financial behaviors. Results were found to be robust across different measurements of financial literacy and behavior, and the issue of the potential for reverse causality was specifically addressed. This study provides a comprehensive financial profile of Millennials with important insight for policymakers as well as financial practitioners.

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Fragile Families’ Challenges for Emergency Fund Preparedness

Rabbani, Abed
University of Missouri at Columbia – College of Human Environmental Sciences – Department of Consumer & Family Economics

Yao, Zheying
University of Missouri at Columbia – Personal Financial Planning

Having an adequate emergency fund is a critical issue for a household’s ability to overcome financial trouble and thus overall financial wellness. Fragile families, which refer to unmarried parents and their children, are ill-prepared in emergency savings compared to an average family. This paper determines the challenges associated with having emergency funds for fragile families and concludes that having debt significantly reduces a family’s likelihood of maintaining an emergency fund and undermines the influence of an increase in income on emergency savings. The odds of having emergency fund are significantly higher in a higher income group than in a lower income group.  

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Risk Tolerance Profile of Cash-Value Life Insurance Owners

Yao, Zheying
University of Missouri at Columbia – Department of Personal Financial Planning, Students

Rabbani, Abed
University of Missouri at Columbia – College of Human Environmental Sciences – Department of Consumer & Family Economics

Life insurance, a risk management tool, generally provides ways to protect against the financial loss due to an individual’s death. This study investigates risk tolerance profile of cash-value life insurance owners and attempts to investigate the association between life insurance ownership and subjective attitude toward different domains of risk by comparing with two logistic models. Inconsistencies exist in risk tolerance in different domains, specifically, life insurance owners are risk-averse in general, but they are risk takers in other domains.

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Is Early Exposure to Financial Education Associated with Positive Financial Behaviors?

Augustin, Lua
Texas Tech University, Students

Martin, Terrance K.
University of Texas – Pan American – College of Business Administration – Department of Economics & Finance

Individuals who have been exposed to financial education make better financial decisions than those who have not. They save more for retirement, have less debt, and diversify their investments. Individuals who are less financially literate tend to have higher debt, utilize predatory lending, and have less in savings. Financial literacy is not to be confused with financial education. Financial education is simply the provision of financial topics via a course. The content of these courses is not well regulated and can vary widely in quality. Financial education courses provide basic knowledge but this still needs to be combined with human capital to make financial decisions. Some argue that financial education courses simply do not work and early exposure is futile. In fact financial education courses may increase consumer confidence in their ability to correctly manage their own finances. This paper uses data from the 2015 National Financial Capability Study to analyze the relationship between when financial education occurs and the resulting financial behaviors. We find evidence to support the hypothesis that early exposure is associated with positive financial behaviors.   

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The Household CFO: Using Job Analysis to Define Tasks Related to Personal Financial Management

Fallaw, Sarah S.
DataPoints

Kruger, Michelle
University of Georgia – College of Family and Consumer Sciences, Students

Grable, John E.
University of Georgia

In many ways, the management of a household’s personal finances is a job that can be analyzed and evaluated like other occupations. Household financial management has several criteria of performance (e.g., savings rate, net worth) making it possible to evaluate the relative effectiveness of an individual in the particular job. In the relatively young field of financial planning, there has been little analysis of the myriad tasks and behaviors that are included in the role of a household financial manager, or what we term household chief financial officer (HCFO). Using techniques from industrial psychology and personnel selection, namely job analysis, the current paper attempts to define categories of critical tasks and behaviors of the HCFO job using two studies. In Study 1, we examined the frequency and importance of a series of household financial tasks using a sample of affluent individuals responsible for financial management within their households. This study provided a rank order of critical tasks through the creation of an overall criticality score. In Study 2, we examined the frequency of engaging in household financial tasks using a crowdsourced sample of individuals responsible for their household financial management to determine if the same tasks would be identified as frequent within a comparison group. The results of the studies identified the frequency of engagement of financial tasks across the two samples, as well as differences in frequent tasks between the two samples. This paper adds to the literature in two noteworthy ways. First, the paper illustrates how concepts from industrial psychology can be applied to situations outside traditional organizational structures. Second, the paper adds to the multidisciplinary nature of financial planning by identifying the critical tasks of any HCFO and highlighting potential predictors (knowledge, skills, abilities, and other characteristics, or KSAOs) that can be used to assess and ultimately develop those who are in the role of managing their household’s finances.  

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Comprehensive Planning for a Stochastic Retirement

Robinson, Chris
York University – School of Administrative Studies

We demonstrate a comprehensive approach to the dual problems of saving enough for retirement and determining how much saving is enough at retirement date, using stochastic models. The paper incorporates two existing models. One evaluates the sustainability of a desired retirement income by estimating the probability of shortfall, given a desired level of stochastic consumption, with a stochastic date of death and stochastic investment returns. The second model estimates the probability of meeting a desired retirement wealth target for any given number of years prior to retirement, with stochastic returns and a stochastic savings rate. When we combine the two, we can provide a useful estimate of how much someone needs to save pre-retirement and how to invest it. Retirement planning has become the most important topic in personal finance in the developed countries. The baby boomers are starting to retire, and many of them are ill-prepared. Defined benefit plans are disappearing, but even those that remain are dramatically underfunded often, to the point where the ability of the sponsors to make up the losses is questionable. The collective result of these factors is to force almost everyone looking forward to retirement to make a much more thorough assessment of the risk that their retirement plans face. A financial planner solves the classic pre-retirement problem by assuming a rate of return and then determining if the current wealth and planned savings in future years will accumulate to a desired retirement goal. The rate of return chosen may depend on a specified investment mix. This procedure is well-established and gives a reasonable estimate of the feasibility of a given retirement plan. It ignores the significant risk of a world of volatile asset returns. Telling a client the standard deviation of returns utterly fails to portray the risk of falling short of a goal. Tahani and Robinson (2010) provide an analytic solution to this pre-retirement savings optimization problem in a stochastic framework that incorporates these risks. The planner specifies the retirement goal and date, and the amount that has already been saved, if any. The planner determines mean and standard deviation of a lognormal rate of return, with the parameters suitable to a given risky asset allocation (e.g., a balanced portfolio, all equity, etc.). The planner also specifies the drift rate and the volatility of the periodic savings amount, and the correlation of the rate of savings and the rate of return. The model estimates the probability that the goal will be met for any periodic savings amount and any set of values for the other variables. It also determines the allocation between the risky portfolio and a riskless asset that will minimize the probability of shortfall. This part of the work improves upon earlier work by Ho et al. (1995, 1996). The planner solves the problem of determining a suitable retirement goal in the same way. The planner works with the client to determine the amount of income desired in retirement. The planner then discounts this projected future required cash flow for a number of years, usually to 3 some average date of death. The present value is then the required target. This procedure again ignores the significant variation in returns, the variation in consumption during the retirement years and the uncertainty of the date of death. Robinson and Tahani (2010) provide an analytic solution to the problem of sustainable retirement income that incorporates stochastic date of death (distributed according to a common mortality function), stochastic returns, correlation between the returns and the consumption, and a drift and volatility for the amount of consumption. The planner specifies the real return distribution and the consumption parameters based on the client’s expected consumption patterns in retirement. The output shows the probability that any given withdrawal rate is sustainable. This paper extends the work of Milevsky and Robinson (2005) by making consumption a stochastic variable instead of a fixed value. Combining these two models allows us a more comprehensive evaluation of the risk any retirement plan at any stage in the life cycle. It will allow us to evaluate more rigorously the claim in Finke et al (2013) that target withdrawal rates previously specified in other simulation studies are not sustainable in the current return environment. Many researchers and planners have expressed concern with sustainable withdrawal issues because of the much lower rates of return on investments during the last decade, coupled with increasing life spans. All of these simulation studies are based on a more narrow focus, since they consider only the given amount at retirement, while we can examine the entire life cycle of retirement planning. All the mathematical development of this research is complete as we expressed it above, but we would like to extend it somewhat further. We have made consumption mean-reverting to overcome one weakness in the previous work, both our own and simulation models. We know that for most people consumption will be somewhat mean reverting. They spend more this year to buy a car, but then they have it for a number of years, for example, and consumption reverts to the longer-run mean, whether that is slowly declining, rising or staying constant in real dollars. If we don’t make consumption mean-reverting, a certain percentage of the time it will keep going up or going down indefinitely, but in practice that doesn’t usually happen. We will also try to make the rate of return mean-reverting, since we know that is closer to observed return behaviour over time. If we allow returns to move completely stochastically without mean reversion, we get the same effect in some percentage of cases as with consumption, it could also therefore give a biased estimate of the probability of ruin. Whatever we are able to do with adding mean-reverting rate of return to the model is undetermined. The remaining work after that is to set up realistic scenarios and display the empirical results of applying the models in some summary form that allows somewhat more general observations. The mortality function is exponential fitted to standard mortality tables but it doesn’t give results much different from using other mortality functions like Gompertz or Gompertz-Makeham.

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Empowering People by Mindfulness and Thinking Boosts

Huang, Peter H.
University of Colorado Law School

Decision-making can be difficult; demand focused, cognitive attention; produce delayed, noisy feedback; require careful and clear thinking; and quite often trigger anxiety, stress, and other strong, negative emotions. A large body of empirical, experimental, and field research finds that people often make decisions resulting in outcomes that are suboptimal as judged by the very people making those decisions. These studies have contributed to the popularity of the idea of nudging people to achieve better outcomes by changing how choices and information are framed and presented. On September 15, 2015, President Obama signed an Executive Order titled Using Behavioral Science Insights to Better Serve the American People. This Executive Order directs executive departments and federal agencies to base the design of policies and programs on research in behavioral economics and psychology about how people make decisions. In particular, the Executive Order specifically directs federal agencies to carefully design how choices are presented and structured (also known as choice architecture) to empower people to make the best choices for themselves and their families. The Executive Order also specifically directs federal agencies to improve how the federal government presents information by devoting more consideration to how the format, medium, and timing of information (also known as information architecture) affects the understanding of that information by consumers, borrowers, and other federal program beneficiaries. Although choice architecture and information architecture can effectively nudge people into better outcomes, choice architecture and information architecture also assume implicitly or explicitly that people’s decision-making processes are immutable or too costly to improve and so fail to improve people’s decision-making processes. This Article advocates that law and policy can and should empower people to make better decisions by educating people about practicing mindfulness and utilizing thinking tools. Mindfulness involves paying attention in a deliberate way to life as it unfolds moment to moment. Mindfulness is currently very popular in American business, culture, and even sports. Much of that popularity focuses on how mindfulness can improve mental and physical health by reducing stress and negative affect. This Article analyzes how mindfulness offers people real options to choose wisely after processing information concerning their feelings, thoughts, and bodily sensations. This Article analyzes research about how practicing mindfulness can improve people’s decision-making. Thinking tools include thinking architecture and thinking technologies. Thinking architecture offers a systematic procedure to split up a complex problem into a sequence of cognitively easier thinking steps that can result in making better choices. Thinking technologies involve computer or digital technologies to assist people in their thinking. Examples of novel, fun thinking technologies include financial entertainment computer video games, such as one where a player is a vampire managing a blood bar and planning for retirement, and video adventure games designed to teach players to recognize and mitigate their cognitive biases.   

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Post-Retirement Spending Discomfort and the Contradictory Incentive to Save

Browning, Chris
Texas Tech University

Khalid, Zunaira
Texas Tech University

This paper analyzes the reasons associated with discomfort from spending down retirement assets. Data collected from a propriety online survey is used to evaluate the impact of savings habits on post-retirement spending discomfort. To better understand the effect of savings habits, we control for risk preferences, spending preferences, longevity and medical expectations, and other relevant life-cycle demographics. The results from this study will provide insight into the behavioral issues that limit post-retirement spending. Individuals save for retirement by forgoing current consumption. Under the assumptions of the life-cycle hypothesis, it is expected that individuals will spend their accumulated savings on post-retirement consumption in an effort to smooth the marginal utility from consumption over time. Evidence that contradicts life-cycle expectations has led researchers to explore why retirees spend less than expected. Uncertainties, such as longevity, medical costs, and market returns have been explored, but the literature related to behaviorally motivated explanations is lacking. Individuals form habits in the pursuit of goals. The existing literature on habit formation has indicated that habits are difficult to break, especially if the habit results in a positive outcome. In the years leading up to retirement, saving for retirement is a positive behavior that increase the likelihood of retirement success, while spending saved money is a negative behavior that can be detrimental to the goal. If people feel concerned about their retirement preparedness, they have the option to save more. When people exit the labor market and enter retirement the habit of saving is likely difficult to break. As a result, when concerns of retirement preparedness arise their default behavior may be to save, which without labor income, will be accomplished by spending less. In the context of habit formation, the goal of this study is to assess the association between savings habits and discomfort from spending down the retirement portfolio. This study adds to the existing literature on the lack of post-retirement consumption. The results of this study will help financial planners and other financial professionals to better understand the behavioral and psychological barriers that limit post-retirement consumption.

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Financial Literacy to Prevent Poor Borrowing Choices

Scott, Janine
Massey University – College of Business

Martin, Terrance K.
University of Texas – Rio Grande Valley

Gibson, Philip
Winthrop University

Working Americans face the new reality of having to fund and manage their retirement, while facing rising levels of indebtedness. A basic level of financial knowledge is essential to make good long-term financial decisions. Using the 2015 National Financial Capacity Study, we investigate the impact of financial literacy on the decision to access retirement plan loans before retirement, or the decision to use one or more high-cost lenders. Our results show that being financially literate reduces the likelihood of using high-cost lenders and using retirement-plan loans. Furthermore, we find evidence of a negative relation between financial literacy and myopic spending.

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Relationships among Financial Strain, Financial Self-Efficacy, Financial Behaviors

Kim, Jinhee
University of Maryland – Department of Family Science

Falconier, Mariana
Virginia Tech

Conway, Andrew
University of Maryland

Individuals and families are engaged in financial management behaviors that could influence their financial well-being (Dew & Xiao, 2011). Multiple factors influence individual’s financial management behaviors. Financial strain could affect financial behaviors negatively. Conversely, negative financial decisions and behaviors could lead to more financial problems. Understanding the factors of financial behaviors is important for researchers and practitioners. Financial literacy alone has not been explaining financial behavior fully while psychological and emotional variables have been found to influence financial behaviors (Farreell, Fry & Risse, 2015; Tang & Baker, 2016; Xiao et al., 2010). Researchers have found that the sense of control or perceived ability to manage finances may affect individuals’ financial behaviors management (Atkinson & Messy, 2011; Dietz, Carrozza, & Richey, 2003). Perceived self-efficacy is individual’s beliefs regarding their own abilities (Bandura, 1997). Social Cognitive Theory (SCT) suggests that self-efficacy influences the adoption of behaviors. However, research also found that domain specific self-efficacy rather than general self-efficacy may be more effective in understanding financial management (Dietz et al., 2003; Lown, 2011; Rothwell, Khan & Cherney, 2016). Financial self-efficacy is relatively new but has been established but has been found to explain financial behaviors (Farrell et al., 2015; Rothwell et al., 2016). High levels of economic or financial self-efficacy have been linked to better cope with rapid financial change, savings, and personal finance behaviors (Farrell et al., 2016; Rothwell et al., 2016). Numerous research has focused on limited types of behaviors such as savings or financial product uses rather than comprehensive financial management behaviors (Dew & Xiao, 2011), which does not provide the full picture of an individual’s financial management practices. Additionally, understanding the use of alternative financial services is important for low to moderate income consumers. Alternative financial services (AFS) have often been the sources of credit for low-income and working poor consumers. These services are available for those who have less favorable or no credit history but often lead to more debt than benefits. Engaging in such behaviors such as borrowing from pay day lender, pawnshops, car title loans often lead to a “cycle of debt” and may decrease consumer well-being (Weaver & Galperin, 2014). The purposes of the current study is 1) to examine the relationship between financial strain and financial management behaviors and 2) to investigate if financial self-efficacy has any effects on the relationship between financial strain and financial management behaviors. This paper reports from the baseline data obtained from a community sample of those who participated in the research a randomized control trial (RCT) assessing the effectiveness of integrating an evidence-based intervention to enhance couple relationships and economic stability. The baseline data (160 couples, 320 individuals, collected from July 2016 to September 2017) from both intervention and control couples will be used for the current study to see the relationships among financial strain, financial self-efficacy, and financial behaviors. Financial strain will be measured by household income and Family financial strain scale (Hilton & Devall, 1997). Financial behaviors will be measured using the Financial Management Behavior Scale (Dew & Xiao, 2011) and the uses of Alternative Financial services from FINRA Financial Capability Study. Financial self-efficacy will be measured using the Financial Self-efficacy measures by Dietz et al (2003). Structural Equation Modeling will be used to examine the relationships among the variables, separately for female and male. 

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The Relationship between Financial Planner Use and Listing Retirement as an Important Saving Goal

Kim, Kyoung Tae
University of Alabama

Pak, Tae-Young
University of Alabama

Shin, Su Hyun
University of Alabama

Hanna, Sherman D.
Ohio State University

It has been well established that financial advice leads to informed decision making and improved financial outcomes. However, there is limited evidence regarding the link between financial planner use and attitude towards retirement saving. As financial planners provide broad advice for the long-term benefits of clients, their clients may become more aware of retirement saving as an important goal. We used data from the 2010 and 2013 Survey of Consumer Finances to examine the association between financial planner use and setting a retirement saving goal. We found that households who consulted a financial planner were more likely to give retirement as the motive for saving, even after we employed a propensity matching technique to reduce possible effects of the endogeneity of financial planner use. Our findings suggest that financial planners do help individuals achieving their long-term financial objectives by highlighting the importance of retirement planning. The use of other types of financial professionals was not associated with the likelihood of giving retirement as an important saving goal.  

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Integrating the Human Element of Advising with Technology – A Futuristic Approach

Schild, Mark
Seton Hall University – W. Paul Stillman School of Business

Riley, Elven
Seton Hall University – W. Paul Stillman School of Business

Will machine based learning (Big Data and Artificial Intelligence) deliver a more consistent alpha and overall higher returns? As the evolution of AI creates even better robo-investing tools, will the adviser become obsolete? As demographics shift and the millennials come of age, will technology replace the human? To all three questions we say NO! In fact, we see a team’s based approach, augmented by AI as the future. Our paper will identify current trends in the industry showing experts coming together to provide a more holistic approach to planning. Our research will show that despite media attention on the millennials, actual assets are coming from other age groups. Additionally, we will show that regardless of the use of robo-investing, advisor-managed portfolios continue to add real value. Not only will we show a team’s based approach as the best strategy, but we will argue that a certified financial planner (CFP) is the ideal quarterback. The “multi-faceted team” should consist of investment adviser, risk management expert, estate planning attorney, and a certified public accountant. Of all the team-members, the CFP is the only one required to at least be literate in all these areas. We will ultimately conclude that a team with technology will always beat a team without technology. We will also conclude that a team with technology will always beat a technology with no team.

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The Effect of Myopic Behavior on Stock Market Risk Perception

Liu, Yi
Texas Tech University – Department of Personal Financial Planning

Guillemette, Michael A.
Texas Tech University – Department of Personal Financial Planning

We investigate whether myopic behavior influences respondents’ risk perception of future stock market returns. Using the 2012 wave of the Health and Retirement Study, we find that investors who are myopic (follow the stock market “very closely” or “somewhat closely”) are more likely to be in a higher subjective probability group that believes the market for blue chip stocks will drop by 20 percent or more next year. In addition, we find that older cohorts have a more accurate perception of future stock market returns compared to younger cohorts. Financial planning implications are provided.

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Optimal Portfolios for the Long Run

Blanchett, David M.
Morningstar Investment Management LLC

Finke, Michael S.
The American College

Pfau, Wade D.
The American College

Findings on how the risk equities relative to bonds changes over investment holding period are varied, but empirical evidence suggests that equities become less risky over time. This increase in allocation to risky asset for long-term consumption goals is commonly referred to as time diversification. Time diversification is found in historical U.S. returns, but analyses of time diversification in international data and over longer time periods are needed to understand how confident advisors can be in tailoring investment strategies to time horizons. Using a constant relative risk aversion utility function with varying levels of assumed risk aversion and investment periods, we find that the optimal allocation to equities tends to increase over investment periods across all levels of risk aversion for 20 different countries. These findings are consistent with the often criticized concept of time diversification and suggest that suggest investors with longer investment time horizons are likely to be better off with more aggressive portfolios, and even investors nearing retirement with a sufficiently long time horizon should hold the majority of their wealth in stocks.

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Investing in Little Johnny’s Sports Dream verses Saving in a 529 Plan: A Good Decision?

Turner, Pamela A.
North Carolina Agricultural and Technical State University – School of Business & Economics

Winchester, Danielle D.
North Carolina Agricultural and Technical State University

The purpose of our paper is to quantify the costs associated with parental spending on youth sports and compare these costs with the financial benefit of college athletic scholarships. The investment in youth sports will be compared to returns of 529 plans. This paper is of utmost important to the financial planning community. Planning professionals need to be aware of all the expenditures their clients are making, particularly ones that add up to thousands of dollars annually. Clients’ inability to stick to budgets and invest for the future could be directly correlated to their youth sports spending.

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Finding a Friend in Turmoil: A Study of Directly-Held Equity and the Dynamics of Financial Advice during the Great Recession

Sunder, Aman
University of Georgia – College of Family and Consumer Sciences, Students

The period of the market correction that followed the Great Recession of 2008 was a time of confusion and distrust. This study intends to find if the financial decisions of some households during this period were more optimal than others, and compare it to the dynamics of their use of certain types of financial advisers. The respondents in the 2009 panel of Survey of Consumer Finances identified advisers as Financial Planners, Brokers, Accountants, Lawyers, Insurance Agents, and Bankers. The continuity of the adviser-use is divided into four groups, keep-adviser, get-adviser, lose-adviser, and no-adviser. The decision to hold-on to or increase the directly held equity by the households can be used as a proxy for trust in the financial markets after the downturn. The study controls for various aspects such as finances, situations, behaviors, shocks, and individual-level heterogeneity and finds that continuity in the use of Broker services and discontinuity in the use of Financial Planner services resulted in highly suboptimal decisions, ceteris paribus.

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Gender Differences in Stock Ownership

Xu, Chen
University of Missouri

Yao, Rui
University of Missouri

Investment choice is critically important in achieving future financial well-being, such as reaching retirement goals, as investors receive higher returns in the long-run if they are willing to purchase riskier investment such as stocks. This study investigates whether gender differences existed in stock ownership using the 2013 Survey of Consumer Finances. Results show that ownership of stocks is not affected by gender in and of itself. Instead, education, income uncertainty and defined benefit pension plan ownership completely moderated gender difference in stock ownership. When working with clients, financial planners should pay special attention to their education, expectation of income uncertainty and defined benefit plan ownership.

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The Cost of Caring: Out-of-Pocket Expenditures and Financial Hardship among Canadian Carers

Duncan, Karen
University of Manitoba – Department of Community Health Sciences (CHS)

Shooshtari, Shahin
University of Manitoba – Department of Community Health Sciences (CHS)

Roger, Kerstin
University of Manitoba – Department of Community Health Sciences (CHS)

Fast, Janet
University of Alberta – Department of Human Ecology

Han, Jing
University of Manitoba

At some point in their lives, nearly half of Canadians aged 15 and older have been caregivers or carers to family members or friends with long-term health, disability or aging-related needs. Many of these carers spend money out-of-pocket on the care-related needs of their family member or friend, and this spending may expose carers to a higher risk of financial hardship. Although the literature on care-related out-of-pocket expenditures (OPE) is growing, we know little about the relationship between financial hardship and OPE, and the changes in financial behavior that result. Using data from a nationally representative sample of family carers age 45 drawn from Statistics Canada’s 2012 General Social Survey on Caregiving and Care Receiving, we explore the relationship between care-related OPE and financial hardship and the financial behaviors, such as modifying spending, deferred savings, and borrowing, used by carers who report financial hardship. The results from multivariate logistic regression analyses exploring risk factors for financial hardship suggest personal financial planning strategies and public policies to minimize the risk of incurring financial hardship due to care-related OPE.

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Factors Related to Volatility in Current Household Income: Implications for Financial Planning

Hanna, Sherman D.
Ohio State University (OSU)

Kim, Kyoung Tae
University of Alabama

Hong, Eunice J.
Korean Women’s Development Institute

Many suggestions in personal finance, such as financial ratio guidelines, are based on the assumption of relatively stable household income. However, little research has been conducted on factors related to household income volatility. We calculate the percent change in inflation-adjusted household income between 2006 and 2008, using the U.S. Survey of Consumer Finances. Ten percent of households had an increase of 87% or more, and 10% of households had a 47% decrease or more. The distribution of the percent change was very skewed, with a mean increase of over 21,000%, and a median increase of 0.2%. Because of the skewed distribution, a quantile regression analysis was conducted to estimate the effects of household characteristics on the percent change in income, at different quantile levels of percent change. The only household characteristics that had consistent effects at the 10th through 90th percentile levels of the dependent variable were 2006 income (negative effect), education (positive effect), and being single in both years. Being self-employed in 2006 had a negative effect at low percentiles but positive effect at high percentiles. We discuss implications for future research, policy and future research, policy and financial planning. 

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The Effect of Student Loan on Homeownership and Home Equity

Cheng, Guopeng
University of Missouri at Columbia

Homeownership in the United States has decreased from 2007 to 2015, especially for those for the 25 to 34 age group (U.S. Census, 2016). This age group experienced an 8.3% decrease in homeownership from 47.5% in 2007 to 39.2% in 2015. In addition, higher interest rates on subprime student loans make it more difficult for college graduates to own a home and accumulate equity in it. It is critical for people to understand the importance of student loan debt on homeownership and home equity. Student loan debt clearly imposes a significant burden on young households. Using the 2013 Survey of Consumer Finances, this study filled in this void in the literature. Having student loan was found to have negatively affected both homeownership and the amount of home equity. Student loan payments reduced respondents’ ability to buy a home and made it challenging for homeowners to build their home equity. 

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The Effect of Having an Education Loan on Having a Heavy Financial Obligations Burden

Ouyang, CoCo
Ohio State University

The purpose of this study was to analyze how having an education loan affected U.S. renter and homeowner households had a heavy financial obligations burden. In 1992, only 15% of homeowners had financial obligation payments over 40% of income (heavy burden), but the proportion increased to 22% by 2007, then dropped to 16% by 2013. The proportion of renters with heavy burdens increased from 20% in 1992 to 35% in 2007, and then increased to 42% by 2013. Descriptive patterns in 2013 showed substantial differences between homeowners and renters in terms of the relationships between household characteristics and the rates of having a heavy burden. We conducted separate logistic regressions of homeowners and renters to ascertain the effects of household characteristics on the likelihood of having a heavy burden. Having an education loan was not strongly related to having a heavy burden for renters, but was related to a higher likelihood for homeowners. However, college educated renters and owners were more likely to have heavy burdens than those without college.  

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The Investigation of Determinants of Retirement Plan Selection among University Employees

Park, Narang
University of Georgia

White, Kenneth
University of Georgia

Using IBM model and financial worry scale, the purpose of this study is to investigate the determinants of university employees’ retirement plan selection focusing on their psychosocial effects.

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Investments in Socially Responsible Funds: Is Good Better than the Great?

Das, Nandita
Delaware State University – Accounting and Finance Department

Ruf, Bernadette
Delaware State University – Accounting and Finance Department

Sunder, Aman
University of Georgia – College of Family and Consumer Sciences, Students

Chatterjee, Swarn
University of Georgia

This paper examines the performances of Socially Responsible Investment (SRI) funds with respect to the market over a 12 year period (2005-2016) that covers the periods just prior to, during, and after the Great Recession. This study compares the performances of SRI funds based on their Morningstar® ESG (Environmental, Social, and Governance) fund portfolio ratings. Additionally, we analyze the factors associated with the performances of the SRI funds using 3 separate four year panels (2005-2008; 2009-2012; 2013-2016). We analyze the factors associated with the performances of the SRI funds over these periods. The study period is divided into three sub-periods of 48 months each in order to examine whether the time periods leading to and following the Great Recession had any significant impact on the results. We further examine the performances of the SRI funds after controlling for the Fama-French 3- and 5-factors. The preliminary findings from our study indicate that the SRI funds ranked in the middle quantiles of the ESG ratings out-performed funds in the upper and lower quantiles on a risk-adjusted basis. The results also show that SRI funds in the middle ESG rating level received the most net cash inflow, indicating investors’ preference for medium rated SRI funds.

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The Psychology of Portfolio Withdrawal Rates

Asebedo, Sarah
Texas Tech University

Browning, Chris
Texas Tech University

This study investigates how personality and psychological characteristics shape portfolio withdrawal rates within a sample of 3,935 U.S. individuals age 50 and over from the Health and Retirement Study. Structural equation model results revealed that those with greater conscientiousness, extroversion, positive affect, and financial self-efficacy have lower portfolio withdrawal rates; whereas those with greater agreeableness, neuroticism, and negative affect have higher portfolio withdrawal rates. Findings from this study provide insight to financial planning practitioners as they explore retirement income planning beyond its technical aspects and seek to maximize their clients’ satisfaction from the consumption of their retirement portfolios.

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Household Debt, Well-Being, and Risky Behavior among Young Adults: Evidence from a National Panel Study

Kim, Jinhee
University of Maryland – Department of Family Science

Chatterjee, Swarn
University of Georgia

The purpose of the current study is to examine the debt burdens, perceived financial capability, and the physical as well as psychological well-being of young adults. We use pooled Panel data constructed from the two most recent waves (2013 and 2015) of the Panel Study of Income Dynamics (PSID) and its Transition to Adulthood (TA) supplement. A discussion of the implications from the key findings of this study for scholars, practitioners, and counselors will be provided.

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Black-White Differences in Life Insurance Ownership among Middle-Income Couples

Reiter, Miranda
Kansas State University – Institute of Personal Financial Planning, Students

Heckman, Stuart J.
Kansas State University

It is well-documented that Blacks have a significantly lower amount of wealth than Whites, which carries a variety of implications. Although there are many historical reasons for the wealth gap that are not easily solved, positive financial behaviors can help Blacks strengthen their financial position, grow their wealth, pass along assets to the next generation, and assist in mitigating financial risk, particularly owning life insurance. Examining life insurance will provide insight into racial ownership differences and will show the extent to which Whites and Blacks are protecting their income. In addition, it will shed light on Blacks’ risk as it relates to life insurance. Two research questions are addressed: (1) Are there racial differences in life insurance ownership? (2) Are there racial differences in the proportion of human capital insured? 

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Annuitized Income and Optimal Asset Allocation

Blanchett, David
Morningstar Investment Management

Finke, Michael S.
The American College

An investor who either buys an income annuity at retirement, or who has a higher level of guaranteed income through a pension or Social Security, should hold a different asset allocation than an investor who holds little guaranteed income. We use current annuity and bond prices to estimate optimal equity allocation for retirees with varying levels of guaranteed income who have higher and lower preference for income stability and bequests. We find that increasing annuitized income has a strong impact on optimal equity allocation. The average retiree will see their optimal equity allocation increase by roughly one percentage point for each percentage point increase in annuitized total wealth. Our results provide insight into prudent asset allocation recommendations for clients who have higher levels of annuitized income.

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Gender Differences in Retirement Planning Behavior: An Examination of the Determining Factors

Hubble, Amy
University of Georgia

Choung, Youngjoo
University of Georgia

Chatterjee, Swarn
University of Georgia

According to the US Department of Labor approximately 59 percent of women participated in the labor force, and women comprised of a little less than 50 percent of the entire labor force in the United States (DOL, 2016). As the largest cohort of the US population–the baby-boomers continue to enter retirement, it is critical to examine the factors that are associated with better financial planning and investment participation decisions among households, and whether men and women differ in their approach to retirement planning. With this research objective in mind, our study uses a nationally representative dataset to examine whether men and women differ in their retirement planning behavior. This study also examines the factors that are associated with retirement plan participation among men and women. We use a multiple regression analyses to empirically test the key hypotheses of this study. Early findings reveal that there exists a significant gender difference in the portfolio preferences and retirement planning behavior among households. Additionally, risk tolerance appears to affect retirement planning decisions difference for men and women. The implications of the key findings of our study will be discussed from a policy perspective.  

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Retirement Spending and Biological Age

Huaxiong, Huang
York University

Milevsky, Moshe A.
York University – Schulich School of Business

Salisbury, T. S.
York University

There is a growing body of medical evidence suggesting that an individual’s biological age can be accurately measured using telomere length – which are the protective ends of chromosomes — and this number can diverge by as much as 10 to 15 years from one’s chronological age, measured in calendar years from date of birth. In other words, a 65 year-old retiree might in fact be as young as 50 or as old as 80 when measured in terms of forward-looking mortality and morbidity rates. As the song goes, age is just another number. And, while the technology to accurately estimate biological age is still being perfected – and other biomarkers of aging might emerge as triumphant — this does raise the possibility that individuals will soon have access to another piece of information that is extremely relevant to wealth management and retirement income planning: Their true age. In fact, it’s not inconceivable that chronological age will eventually take a back seat to biological age in the public discourse around retirement policy. Moreover, it’s quite clear from the medical literature that biological age should not be viewed simply as an age set back on a (deterministic) mortality table or a fixed health adjustment factor, both of which are common in insurance practice. The joint dynamics of biological (B) age and chronological (C) age are subtle and mathematical non-trivial. For example, the divergence between B-age and C-age is highest around middle C-age and lowest at younger and older C-ages. Intuitively, a (live) centenarian’s B-age is quite close to her C-age. Motivated and inspired by this idea, in this paper we develop an economic lifecycle model of saving and consumption in which the (rational) economic agent has two distinct ages at every point in time; B-age and C-age. We assume the classic set-up of a retiree with a fixed endowment (i.e. nest egg) with some exogenous pension (i.e. annuity) income and derive the optimal spending rate as a function of the two ages. Our framework naturally collapses to the famous Yaari (1965) model when B-age is forced to equal C-age at all times. From a practical point of view, our paper offers a normative guide to retirees (and their advisors) on proper spending rates as an alternative to the so-called 4% rule, which has little basis in financial economic theory. In sum, neither B-age or C-age is a sufficient statistic for making retirement spending and drawdown decisions. A rational retiree requires joint knowledge of C-age, B-age and their covariation to behave optimally. We end the paper with a discussion of some broader implications for proper retirement policy in a (future) world in which true age has little to do with the number of times you have circled the sun.  

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The CPP Decision

Charupat, Narat
McMaster University – DeGroote School of Business

Parlar, Mahmut
McMaster University – Michael G. DeGroote School of Business

Canada’s retirement income system consists of three pillars. They are (i) universal government benefits for seniors; (ii) Canada Pension Plan (CPP); and (iii) employment pension plans and individual retirement savings. In its current form, CPP was designed to provide lifelong income that replaces 25% of pre-retirement income, up to a certain maximum amount. For 2017, the maximum CPP payment is $1,114.17 per month or $13,370.04 per year (all figures in Canadian dollars). However, the actual amount that one will receive depends on how much and how long one has contributed into the CPP at the time of eligibility. The actual amount also depends on the age at which one chooses to start receiving payments. As of January 2017, the average actual amount that new beneficiaries receive is $685.11 per month (or $8,221.32 per year). While the average (or even the maximum) amount of CPP income does not seem very high, it should be noted that according to the 2014 income survey by Statistics Canada, the median after-tax annual income of seniors (aged 65 or older) is only $26,900. That is, for many retirees, CPP income constitutes a substantial portion of their overall income. Therefore, it is important for people who are near retirement to make careful decisions regarding their CPP pension. The most common CPP decision is when to start receiving pension payments. The standard age to apply for and receive a full (i.e., with no penalty) CPP retirement pension is 65. However, an individual can take a reduced pension as early as age 60. The amount of reduction is 0.60% for each month he/she starts to receive it before age 65 (or 7.2% per year). For example, someone who applies for a CPP pension at age 60 will receive 36% less than the full amount. On the other hand, an individual can delay taking a CPP pension up to age 70, in which case the amount of payment will increase by 0.7% for each month after age 65 (or 8.4% per year). For example, an individual who starts taking his/her CPP pension at age 70 will receive 42% more than the full amount. Accordingly, the choice of CPP start time can have a significant impact on the amount of pension that an individual will receive for the rest of his/her life. Not surprisingly, financial advisors have frequently been asked to provide recommendations on the optimal CPP timing. Typically, an analysis is carried out to compare the total amount of money (or its present value) that an individual will receive if CPP pension is taken immediately to the case where the pension is taken at a later date. Because the “bonus” rate for delaying CPP collection (i.e., 7.2% per year) is high relative to current investment rates of return, the analysis generally favours delaying taking the CPP pension until age 70 for people who are in good health and have no immediate need of funds. Despite the substantial benefit of delaying, the overwhelming majority of Canadians do not take advantage of it. Only 6.5% of the people who started collecting CPP payments in 2016 did so at age 66 or older. In contrast, 40.7% of them did so at age 60, while another 29.9% did so at age 65.7. A similar observation also occurred in prior years. Several explanations have been offered for this observation. They include lack of savings, fear of dying too soon, and concern about the future viability of CPP. The fact that only a small fraction of people take advantage of the delaying benefit warrants a closer look at how CPP decisions are made. In this paper, we formally analyse CPP decisions by modeling pension income as a function of the age at which collection is started. In particular, we consider the decision of an individual who has just turned 65 years old and has to decide whether to apply for a CPP pension immediately or wait. The individual wants to maximize the value of the pension income, given the investment (i.e., discount) rate and his/her probability of survival. The reason why we concentrate on the decision at age 65 even though the individual can initiate CPP payments at age 60, is that in order for an individual to receive the maximum CPP benefits (currently at $13,370.04 per year, as mentioned above), two requirements have to be satisfied. First, he/she has to contribute into the plan for at least 39 years. Secondly, the contribution in each of those 39 years must be at the upper limit. For a typical individual, these two requirements are not easily achieved at age 60. As a result, the CPP decision at age 60 can be complicated by the desire to continue working until the two requirements are met. We show that the pension timing decision depends on the interaction among the individual’s mortality risk, the (nominal) interest rate, the inflation rate, and the rate of bonus if pension is delayed. Using the mortality probability of an average Canadian, our results suggest that individuals should delay collecting their pension when the (nominal) interest rate is low. On the other hand, when the interest rate is high, individuals should start their pension early. We note, however, that the interest rate will have to be extreme (compared to what has been the norm in recent years) in order for individuals to choose to take his pension at age 65 (his current age) or at age 70 (the latest possible). For other levels of the interest rate, the optimal time is somewhere in between.

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