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

Figure 5: Welfare Losses, ∆W0 / W0, for U.S. (SCF) Data;
Gender = 0 (male), γ = 2, δ = 0.95, 0.97, or 0.99, Age = 50, Education = Middle

--- put Figure 5 here ---

The explanation for this effect is straightforward. A higher δ makes the individual
more oriented toward the future; thus, savings, and the potential amount of money
invested suboptimally, increases. Furthermore, with a higher δ, all future losses are
less heavily discounted.

Figure 6 shows the impact of different education levels.

Figure 6: Welfare Losses,   ∆W0 / W0,   for U.S. (SCF) Data;

Gender = 0 (male), γ = 2, δ = 0.97, Age = 50, Education = Low, Middle, or High

--- put Figure 6 here ---

Higher education for U.S. investors generally leads to higher welfare losses. This is
partially caused by the coefficients for the education dummy variables that imply
adjustments to asset allocation in the opposite direction of the normative model
predictions. Thus, the higher welfare loss for highly educated individuals can be
explained by a larger gap between the optimal asset allocation and the empirical one.
For the lower welfare loss for individuals with low education, another effect is
responsible (the first would imply higher losses too). Having lower education is
associated with lower expected income growth. Thus, for the same current income,
the discounted value of expected labor income is lower for individuals with lower
education. This leads to higher savings rates, making deviations in asset allocation
more painful, due to the relatively larger amount saved and suboptimally invested.
For those with higher education, this mitigates somehow the consequences of the
first effect.

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