Hidden Group Time Profiles: Heterogeneous Drawdown Behaviours in Retirement

TL;DR

This paper analyzes heterogeneous retirement drawdown behaviors using a novel extension of the Grouped Fixed-Effects estimator, revealing that retirees often follow simple heuristics in wealth decumulation, with methodological innovations for better inference.

Contribution

It introduces two extensions to the GFE methodology, enabling broader inference and improved estimation for unbalanced panel data with fixed effects.

Findings

Retirees exhibit distinct drawdown behaviors based on latent groupings.

The proposed methods improve inference on time profile estimates.

Retirement wealth decumulation can be explained by simple heuristics.

Abstract

This article investigates retirement decumulation behaviours using the Grouped Fixed-Effects (GFE) estimator applied to Australian panel data on drawdowns from phased withdrawal retirement income products. Behaviours exhibited by the distinct latent groups identified suggest that retirees may adopt simple heuristics determining how they draw down their accumulated wealth. Two extensions to the original GFE methodology are proposed: a latent group label-matching procedure which broadens bootstrap inference to include the time profile estimates, and a modified estimation procedure for models with time-invariant additive fixed effects estimated using unbalanced data.