What happens to defined contribution accounts when labor markets and financial markets move together?
The relationship among earnings, savings, and retirement is well known; however, the linkage between labor market outcomes and financial market performance is generally unacknowledged. We examine the implications of the link between labor markets and financial markets for workers who save money in individual retirement accounts. Specifically, differences in labor market outcomes across groups may imply differences in the timing of investments, which may reduce savings over time for these groups compared to their counterparts. Using monthly data from the Current Population Survey (1979-2002), we generate hypothetical investment portfolios using stock and bond indices. We exploit differences across demographic groups in unemployment and wage growth and use these differences to examine each group's investment outcomes. We then disaggregate the total effects into short-term and long-term components. We find some evidence of short-term market timing effects on investment, but we find much larger long-term effects for some groups. Our findings suggest that, for many people, the retirement savings losses associated with the timing of markets are similar to the costs of annuitizing savings upon retirement. The differences are especially pronounced by education and gender.
Weller
Christian E
CE
McCormack Graduate School, University of Massachusetts Boston, Boston, MA 02125, USA. Christian.Weller@umb.edu
Wenger
Jeffrey B
JB
D000368:Aged; D004522:Educational Status; D004651:Employment / Q000191:economics*; D005260:Female; D006801:Humans; D007182:Income / Q000706:statistics & numerical data; D007449:Investments / Q000191:economics*; D008297:Male; D010415:Pensions / Q000706:statistics & numerical data*; D012737:Sex Factors; D013997:Time Factors; D014478:Unemployment / Q000706:statistics & numerical data; D014481:United States