Risk Preferences and the Investment Decisions of Older Americans

The three-legged stool of retirement income policy assumes that, in addition to relying on projected Social Security benefits, individuals will participate in private pensions and will save on their own to ensure an adequate post-retirement standard of living. Examination of individual portfolios reveals that for many households, accumulated wealth may be insufficient to accomplish this goal. Although part of the problem is that households simply have lower savings rates than in previous generations, we also observe high levels of personal debt, a large proportion of household portfolios invested in housing, and substantial investment in low-risk assets. Since riskier portfolios generally result in higher returns for long-term investors, overly conservative investment behavior may result in reduced retirement wealth. Given the trend in private and public pensions to allow more participant choice in retirement savings asset allocation, individual risk aversion is an important policy issue. This report reviews and synthesizes research findings on individual risk aversion and investment allocation. It then uses the Health and Retirement Study (HRS) to estimate risk preferences and to evaluate the factors that impact asset allocation in individual and household portfolios for a sample of older Americans. Of particular interest is the examination of differences in risky allocation decisions between women and men in the sample and investigation of the factors that impact investment decisions for each of these groups, including age, race, income, wealth, marital status, and education.

Investments/Risk Aversion

10712