The Impact of Individual Investment Behavior for Retirement Welfare: Evidence from the United States and Germany

A typical shape of the investment into the risky asset as a function in the labor
income-to-cash on hand ratio is shown in Figure 1.

Figure 1: Investment into the risky asset as a function in the labor income-to-
cash on hand ratio for German (EVS) data, Gender = 0 (male), γ = 2, δ = 0.97,
Age = 30, Education = Middle

--- put Figure 1 here ---

The impact of risk aversion on the risky asset share is straightforward. The risky
asset share decreases with increasing values for γ. The impact of a change in the
subjective discount factor δ depends on the individual’s expected labor income. Both
increases and decreases of the risky asset share are possible. In general, increasing δ
will result in higher savings, because the individual places more weight to future
utility. By saving more, the individual’s expected labor income decreases relative to
the higher saving-induced increase in cash on hand, thus resulting in a lower risky
asset share. But putting more weight on future utility also implies that the
individual’s value of future labor income is larger (less discounted), and thus the
risky asset share can also increase. The overall effect in general is rather small.

Having a higher life expectancy—that is, higher one-period survival probabilities pt
(like women have compared to men)—is similar to an increase in δ. Thus, the overall
effect is small and ambivalent.

Increasing age has generally a negative impact on the risky asset share given some
fixed value for the labor income-to-cash on hand ratio which is illustrated in Figure
2. With increasing age the amount of expected future labor income decreases,
leading to a lower risky asset share. The kink at age 66 results rather from a
measurement effect: the retirement-induced drop in income at the end of age 65
lowers the labor income-to-cash on hand ratio for a fixed value of cash on hand
ratio. Thus, in order to stay on a line in Figure 2, i.e., hold the labor income-to-cash

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