Study looks at psychology behind spending decisions
Retirees’ spending decisions could be better influenced by 5 key policy options according to a new academic study.
Researchers from the University of California and City University of London studied how psychological factors greatly affect the spending of savings (decumulation) during retirement.
Impulse, loss aversion, and the desire for ownership are all psychological predictors that can lead retirees to manage their assets poorly and spend savings too rapidly or too slowly, the study found.
"Baby boomers are now retiring at the rate of almost 10,000 per day," wrote authors Suzanne and Stephen Shu. "These millions of retirees, and the families and providers who look out for their financial well-being are counting on a smarter approach to decumulation."
Five policies for smarter retirement fund management
The study proposes 5 policy options for public policy experts, financial services regulators, and social program administrators:
1. Financial Literacy: Financial training programs offered before complicated or risky investment decisions, similar to the training required to obtain a driver's license.
2. Safe Automatic Options: A low-cost option to protect a proportion of the individuals' total wealth, yet still allow discretion by the retiree for the remainder. Such an option could be built into an employee's retirement benefit program.
3. Precommitment: If individuals are at risk of future intellectual decline as a result of dementia or another similar disorder, commitment to financial decisions during younger working years could be especially useful. Options could include payments made over time.
4. Disclosures and Framing: Changes in language can also affect decumulation decisions. For example, reframing continued employment as an investment in future social security income may cause those considering retirement to feel more inclined to wait.
5. Customized Interventions: A financial robo-advisor that would perform an assessment of a retiree's key psychological drivers, biases, and inclinations before leading them through personalized solutions. Such interventions would provide policy makers with more insight to individual biases, preferences, and problem-solving techniques, allowing them to work in tandem with individuals, rather than in opposition.
The full study is published in Policy Insights from the Behavioral and Brain Sciences.
