How Households Adjust their Consumption and Investment Plans under Longevity Risk: An Experimental Approach-based Study in Taiwan

Abstract

Longevity risk may be defined as the risk of outliving one's accumulated wealth. Although many theoretical studies have suggested that individuals will increase their precautionary saving in order to mitigate longevity risk, only a few of such studies have used empirical data to test people's decision-making behaviour in response to longevity risk. The main purpose of this paper is to investigate how households adjust their consumption and investment plans in response to longevity risk. We find that households reduce their consumption over their entire lifespan and increase the proportion of their risky assets before retirement when they face longevity risk. Furthermore, we also discover that households with females, more children, higher health expenditure and greater risk aversion change their risky assets to a lesser extent in their whole life period in the face of longevity risk, compared with other households.

Perceptions of Retirement Savings Relative to Peers

“…A more novel finding, however, was that those who expected to live longer in retirement were found to have saved more. This is evidence of a rational decision-making approach to managing longevity risk (Tien & Miao, 2013), in which expectations of the number of years one is likely to live guides one's financial accumulations in the pre-retirement period. This ability to regulate saving effort so as to match anticipated future dissavings (cf., Ando & Modigliani, 1963;Modigliani & Brumberg, 1954) in the post employment period is indeed one of the keys to effectively managing one's personal finances over the course of the life cycle.…”