SSRNTalking Financial Resilience and Retirement Readiness with the TIAA InstituteThe TIAA Institute builds and shares knowledge about a wide range of issues related to financial well-being and organizational effectiveness. As a think tank within TIAA, they have a keen focus on retirement planning and outcomes with good reason. 39% of households in America are at risk of being unable to maintain their standard of living during retirement. Contributing to the challenge, more than half of Americans lack a basic understanding of how long people will live in retirement. Workers without longevity knowledge are less likely to plan and save for retirement.For several years, the TIAA Institute has partnered with the Pension Research Council (PRC) at The Wharton School of the University of Pennsylvania on a Behavioral Finance initiative designed to sponsor research that provides thought leadership and insights on Americans financial security. The TIAA Institute hosted a Symposium April 2024 with the PRC, highlighting recent research from this initiative. During question-and-answer sessions at the Symposium, Dave Richardson, head of research at the TIAA Institute, shared the Institutes findings on boosting financial resilience and retirement readiness.Q: Dave, we know that many Americans are struggling financially. What are factors that can lead to improved financial well-being that were discussed at the Institutes symposium?A: Financial well-being is often assessed using objective measures such as income, discount rates and financial literacy. It is not usually calculated using individual perceptions and behaviors (e.g. financial satisfaction or stress and budgeting). Jennifer Coats and Vickie Bajtelsmits paper New Insights into Improving Financial Well-being expanded beyond objective measures and identified attitudes and behaviors that lead to better financial well-being (FWB), especially the quality of patience as measured by the discount rate, and risk tolerance. Someone who prefers to receive money now versus later may make poorer financial decisions, have lower quantitative outcomes, and a reduction of a holistic sense of well-being. While those with higher risk-tolerance are associated with more investment actions, higher quantitative outcomes, and improvement in a composite well-being in the face of the unavoidable uncertainty regarding ones financial future.In addition, financial literacy and the Big Five personality types (openness, conscientiousness, extroversion, agreeableness, neuroticism) advance FWB, particularly a positive sense of conscientiousness and a lack of neuroticism. They also found that financial literacy is necessary but not sufficient to enhance FWB. If individuals lack the confidence and/or patience to make sound financial decisions, the influence of financial literacy on FWB is limited. Best FWB outcomes accrue to those with both financial literacy and confidence in their ability to make financial decisions and achieve financial goals.Many policy initiatives take a holistic approach to improving FWB. While generally helpful, a more effective strategy would be to focus on specific areas identified in the study. Given the broad negative influence of high individual discount rates on FWB, financial literacy programs should aim to increase understanding of the time value of money. In addition, financial advisors can help individuals focus on developing positive behaviors that best align with their personalities, as opposed to attempting to change deep-seated traits.Q: What was discussed about how debt factors into financial well-being?A: Two papers regarding debt were shared that focused on student loans. Other Institute research found that Americans hold an average of two loans 47% with mortgages, and 20% with student loans. Managing student loans and debt in general is critical for financial well-being to and through retirement.The study at Georgia State University asks if modest financial incentives might boost the take up of financial aid counseling offered on campus, the effects of such counseling, and the degree to which counseling helps hard-to-reach populations. James Cox, Daniel Kreisman and Stephen Shores report Do Additional Dollars Buy Engagement? included an experiment that randomized the provision of financial incentives for students who were at risk of dropping out for financial reasons, and found a small uptick in the number of students who attended counseling, but from low base rates. They also found that monetary incentives are particularly effective at inducing students of color to attend counseling, however, students who attended counseling because of the incentives did not reenroll at higher rates the following semester than those who attended without a financial incentive, regardless of how much was paid to induce them to attend.Nearly 50 million Americans owe over $1.75 trillion in student loan debt, while simultaneously needing to save for retirement. Another report, Estimating the effect of employer matching contributions offsetting student loan debt by Vanya Horneff, Raimond Maurer, and Olivia Mitchell investigated how workers can manage both debt repayment and retirement savings, given employer-sponsored matching retirement contributions for qualifying student loan payments, as intended by the SECURE 2.0 Act of 2022. They developed a model that predicts the SECURE 2.0 employer student loan payment matches will:Cause levels of outstanding student debt after age 30 to fall far more slowly than before, because workers will make significant less use of one-time payoffs (which would mean foregoing the employer match).Reduce workers retirement savings contributions by almost 50% but account balances will differ very little because of the higher employer matching contributions for loan repayments.Lower nonretirement asset balances only slightly.Enhance pre-retirement consumption by up to 3%, as a result of lower retirement contributions.To achieve SECURE 2.0s potential, employers will need to voluntarily provide the loan repayment match, and plan service providers will need to allow that to happen in practice.Q: The average Americans lifespan has increased rapidly in recent decades. Dave, what were the implications regarding the future of advice explored during the fireside chat between Joseph Coughlin and Surya Kolluri?A: For years, MIT AgeLabs Joseph Coughlin has been researching the changes in the perceptions of the role of the financial advisor as well as the transforming technology, demographic, and consumer landscapes. Coughlin and Kolluri talked about how longer lives mean that retirement planning cannot focus on a single life stage. Clients are demanding advisors more than just manage money, that they integrate non-traditional topics such as quality of life implications. They envision future advisors more like lifelong confidants, and their offices more like a family-oriented space of relationship-building. Advisors can become team builders and leaders, connecting clients with the specialists they need for holistic life planning (geriatric managers, certified home modification specialists, senior housing consultants, etc). In addition, they suggest product developers accommodate for these longer-life needs by creating technology, services, and conversations that address life now, not just retirement tomorrow.Q: Decisions about when to retire and how to draw down wealth are complicatedand can have long-lasting ramifications. What was shared during the research forum?A: In Retirement, Social Security deferral, and life annuity demand, Sita Slavov shows that for lower-income individuals who have high discount rates relative to the real interest rate, claiming Social Security early and not annuitizing other assets can be optimal, since Social Security usually adequately replaces their pre-retirement income. The act of spending down private retirement saving early and relying entirely on Social Security during retirement is effectively purchasing an annuity from Social Security, rather than in the retail market. When interest rates are low, most people should not claim early while also annuitizing other assets.Slavov found many are not using this parallel strategy any longer, and identifies some reasons, including the shift towards defined contribution pensions. She suggests that a more generous actuarial adjustment for delaying Social Security lowers the price of the annuity one can purchase by delaying benefits. Increasing monetary benefits as individuals increasingly delay Social Security as well as changing language around claiming ages can have an impact on when individuals choose to retire and how they draw down their wealth.Q: Does planning for economic shocks reduce the likelihood of financial fragility? What is the role of financial literacy?A: The timing of retirement is a major determinant of lifetime income and, likewise, a crucial factor affecting financial security. Yet people face uncertainty about the timing of their retirement. In their report How do life events affect retirement timing? Aspen Gorry and Jonathan Leganza work to understand how people navigate this uncertainty and how life events influence when they choose to retire. They found that nearly 1/3 of workers retire five years earlier or five years later than expected.Gorry and Leganza study how retirement expectations evolve as workers age. Older workers tend to expect to work longer than younger workers. They discovered that demographic, economic and health characteristics influence these expectations. Particularly, health shocks, such as cancer, lung disease and arthritis lead to earlier retirements more than economic or family shocks, which has implications for retirement planning. For example, individuals with good health, high income, and high wealth tend to expect to work longer as they age, whereas those with health shocks such as a cancer diagnosis tend to work less as they age. They also found that on average, the birth of a grandchild or a divorce do not affect retirement expectations.The findings clearly highlight the prevalence of retirement timing uncertainty. Yet retirement timing is a key input in the design of retirement target-date funds. Plan administrators can help by offering more flexibility for workers to adjust how their savings are invested after life events that change their retirement expectations.To assist households to better withstand economic shocks and address income needs in times of crisis, Robert Clark and Olivia Mitchell investigated the relationship between financial resilience and financial literacy in the report Financial fragility, financial resilience, and pension distributions. They found that individuals who are older and have elevated levels of education, financial literacy, and income are more likely to be financially resilient and prefer income annuities rather than lump sum distributions. They developed a financial resilience index and found that the index is relatively stable over time, even in the face of the COVID-19 pandemic, and a good predictor of future economic behavior and outcomes. This may be due to the expansion of unemployment benefits and government stimulus checks distributed during the pandemic.They found that policies and programs that enhance financial resilience are likely to help older households withstand unexpected shocks, while boosting financial literacy can help people of all ages withstand shocks. Programs and policies that boost financial resilience and literacy could significantly increase retirement well-being. To view more papers from the TIAA Institute on SSRN, visit the TIAA Institute Research Paper Series. To subscribe to the TIAA Institute Research Paper Series eJournal, click here