Welfare costs of suboptimal retiree decisions

Key Questions

• What are the welfare costs of suboptimal investment decisions by retirees?

  Suboptimal decisions in investment incur varying welfare costs. Misallocations in bond holdings are more detrimental than in stocks. Among all decisions, suboptimal consumption imposes the highest welfare costs, underscoring its critical impact on retiree welfare.

• Is under-investing in stocks less costly than over-investing?

  Yes, under-investment in stocks results in lower welfare costs compared to equivalent over-investment, according to the study.

• How does avoiding the bond market impact retiree welfare?

  Avoiding the bond market has a more negative impact on welfare than choosing not to participate in the stock market, indicating the critical role bonds play in retiree portfolios.

• Why is simplifying investments into bonds less costly than other choices?

  Retirees who simplify their investment strategy by holding only bonds incur lower welfare costs than those who invest exclusively in other asset types. Bonds provide stability and align well with retirees’ risk preferences.

• What is the impact of suboptimal housing consumption on retiree welfare?

  Overconsumption of housing is less costly than underconsumption. Housing decisions have significant welfare implications but are less impactful than suboptimal consumption or savings decisions.

• How does the recursive utility model differ from the expected utility model in capturing retiree preferences?

  The recursive utility model better reflects retirees’ preferences for bonds over stocks compared to the expected utility model. It provides a more nuanced understanding of retirees’ risk and time preferences.

Summary Video Not Available