How personality traits influence retiree spending

By Angela Betsaida B. Laguipo, BSNNov 18 2019

After working for years, retirement marks the time to spend on one’s self and health. Throughout the productive years, most people save money for retirement through various means. However, the challenge during retirement is to convert the savings into an ongoing income stream enough to help retirees have funds throughout their retirement years.

A new study published in the journal Psychology and Aging shows how personality traits shape retiree spending. A team of researchers at Texas Tech University investigated how personality and psychological characteristics influence portfolio withdrawal rates. They gathered data from 3,678 individuals in the United States who are 50 years old and above, who are all part of the Health and Retirement Study.

Image Credit: William Potter / Shutterstock

Psychological qualities and PWR link

To land to their findings, the researchers used structural equation models. The results show that those with greater positive affect, conscientiousness, extraversion, and financial self-efficacy have lower portfolio withdrawal rates (PWR). On the other hand, those with better neuroticism, negative effect, openness and agreeableness had higher PWR.

The researchers have shown that there is a link between psychological characteristics and PWR. Further, the findings of the study shed light on financial planning practitioners and exploring retirement planning more than just its technical aspects. Hence, they can use this data to determine their client’s satisfaction when getting and spending their retirement portfolios.

The portfolio withdrawal rate (PWR) is the rate of regular portfolio withdrawals that leads to a zero balance over a given time frame. Retirement lifestyle depends on not only on assets and investments, but also on how retirees spend and draw down the retirement portfolio. If retirees take too much of the funds soon, they might run out of money in the later years.

Retire spending profiles

In the past, there is only limited data on what shapes the portfolio withdrawal decisions of seniors and retirees. However, the new study analyzed data from previous models along with studies that tackle safe portfolio withdrawal rates, retiree spending profiles, and portfolio incoming-producing products, provide a better understanding of the factors to be considered when making retirement income plans.

The new study, however, provided a better insight into the link between personal characteristics and portfolio withdrawal rates. This way, there will be a better understanding of the behavioral mechanisms that can affect and influence retirement spending decisions.

To land to their findings, the team used data between 2012 and 2014 of the Health and Retirement study, which was sponsored by the National Institute on Aging and conducted by the University of Michigan. The team paired personality and psychological data from the 2012 and 2014 waves of the Leave-Behind Psychosocial and Lifestyle Questionnaire and the 2014 RAND data file, which was a user-friendly longitudinal data set based on the Health and Retirement Study. Further, the team also analyzed IRA withdrawals for the respondent and spouse.

Conscientiousness and self-efficacy

They found that psychological characteristics had indirect and direct connections with PWR after taking into consideration sociodemographic and financial factors that shape retirement spending decisions. Financial self-efficacy and conscientiousness are the strongest direct psychological predictors of PWR. This means that people with greater financial self-efficacy and conscientiousness had higher levels of organization, financial planning, and prudent financial behavior.

“Overall, results reveal a story that is consistent with what is currently reflected in the saving and spending literature, suggesting that those who are successful in accumulating wealth for retirement transfer their saving-oriented behavioral tendencies into their portfolio withdrawal decisions,” the researchers noted.

“Findings from this study provide insight to practitioners and researchers as they explore retirement income planning beyond its technical aspects and seek to better understand what motivates clients’ retirement spending decisions.,” the researchers added.
The study is the first one to provide light on using the psychological theory to explain portfolio withdrawal rates. The findings of the study can help provide a basis for the future investigation into PWR. Overall, the results highlight the importance of psychological modeling in the portfolio withdrawal rate space, hence, providing a foundation for future studies and researches.