Sherman D. Hanna

The Effectiveness of Family Life Cycle Variables in Consumer Expenditure Research

Traditional family life cycle, revised family life cycle, and family composition variables are compared in models predicting total family clothing expenditures. There is little difference in the predictive ability of the three sets of variables. In models controlling for socioeconomic and demographic variables, family life cycle and family composition variables have little predictive ability, independent of income.

Does Risk Tolerance Decrease with Age

This study examines the effect of age on risk tolerance. The life-cycle investment hypothesis is tested using the 1983-89 panel of the Survey of Consumer Finances. Household wealth is defined as the sum of human capital and net worth. Risk tolerance is measured by the ratio of risky assets to total wealth. Risk tolerance increases with age when other variables are controlled.

Determinants of planned retirement age

Abstract Determinants of planned retirement age are analyzed. The prediction equation indicates that planned retirement age increases substantially as people get older, and increases somewhat with higher noninvestment income. Social Security reform should recognize that the capacity to continue working and the ability to afford to retire both influence the age at which people plan to retire. The range of planned retirement ages suggests that research on the adequacy of retirement preparation should focus on planned retirement age. Financial planners should consider the finding that planned retirement age increases with age.

Mean and pessimistic projections of retirement adequacy

Abstract Retirement adequacy is estimated using a 1995 United States sample of households. Based on mean lognormal portfolio projections and current contribution rates, 52% of households are adequately prepared for retirement. Based on pessimistic projections, only 42% of households are adequately prepared. A regression of the ratio of projected wealth to needs at retirement shows that adequacy increases with stock share (mean projection) and the impact increases with time until retirement. With pessimistic projections, there is no significant relationship between stock share and the adequacy ratio. Planned retirement age and household spending behavior are each significantly related to the adequacy ratio.

The Concept of Risk Tolerance in Personal Financial Planning

Assessment of risk tolerance is fundamental to proper asset allocation within a household portfolio. It is also a frequently misunderstood concept and difficult to measure practically. We discuss the relationship between risk aversion and portfolio recommendations based on an expected utility approach, review selected empirical research on risk tolerance, and propose to separate risk capacity, expectations, and other factors from the concept of risk tolerance.

Financial Ratio Analysis of Korean Households

The purpose of this study is to explore the usefulness and limitations of six family financial ratio guidelines developed in the United States in assessing the financial situation of households in South Korea. The ratios examined are debt safety, debt service, solvency, liquidity, savings, and capital accumulation. Guidelines for the first three ratios tend to be enforced by lenders and have similar patterns in both countries, but Korean households are much more likely to meet savings and liquidity guidelines than are U.S. households, and are much less likely to meet the capital accumulation guideline. Multivariate logistic regression analyses show complex patterns of effects of demographic variables on whether Korean households meet each guideline. In four out of six logistic regressions, having a graduate or professional degree has a negative effect on meeting the guideline, raising questions about the appropriateness of the guidelines.

Real income growth and optimal credit use

Abstract Borrowing may be optimal if real income is expected to increase. If income growth is uncertain, optimal credit use is not obvious. A two period model of consumption for determining optimal credit use is presented. The impact of real income growth is analyzed with numerical analysis. The results may be useful for financial counselors and educators, as well as for insight into empirical patterns of credit use. The income growth rate expected by the household plays a crucial role in determining optimal credit use for current consumption.

Ownership and Ownership Preference: A Comparison of Ols and Logit Regressions

AbstractTo assess the magnitude of the advantage of logit analysis over ordinary least squares regression, the two methods are used for similar models of ownership and ownership preference as functions of age and age squared. The extent of the differences between the two methods Is shown in graphs. For most purposes, it makes little difference which method Is used, so the ease of use and interpretation of OLS suggests it may often be an acceptable method.

Savings Goals and Saving Behavior from a Perspective of Maslow's Hierarchy of Needs

The purpose of this study was to examine associations between saving goals and saving behavior from a perspective of Maslows Hierarchy. Using 1998-2007 Surveys of Consumer Finance datasets, we analyzed responses given to an open ended saving reason question, and categorized responses into six saving goals. The retirement/security goal was the most frequently mentioned, and the self-actualization goal was the least frequently mentioned. We tested two models to ascertain whether the order of response differed in the likelihood of saving, measured as whether households spent less than income. Model 1 tested the effects of whether particular goals were given as the first response to the open-ended question, and Model 2 tested the effects of whether particular goals were given as any response. In both analyses, self actualization and retirement/security had the strongest associations with saving behavior.

Time preference assumptions in normative analyses of household financial decisions

Economists conducting normative analyses of household financial decisions typically assume specific values of parameters of the household utility function. We review 12 normative analyses and discuss justifications for the personal discount rates assumed. None of the normative articles cited an independent estimate of the personal discount rate. Instead, the authors made arbitrary assumptions or cited another article’s assumption. We conclude with recommendations for assumptions about the personal discount rate in normative analyses of household financial decisions.