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How real people make long-term decisions: The case of retirement preparation

  • Binswanger, Johannes
  • Carman, Katherine Grace

Large variations in retirement wealth are common, with some households accumulating hundreds of thousands of dollars and others accumulating next to nothing. We examine to what extent formal planning or simple rules of thumb contribute to these differences in wealth accumulation. In particular, we investigate whether those who follow simple rules of thumb or those who come up with more complete plans accumulate more wealth than those who take an unsystematic approach. We test this empirically using a specifically designed survey about retirement preparation. We find that people who rely on a rule of thumb behave like literal planners. However, people without any systematic approach save substantially less. Our results, taken together with evidence from psychology, suggest that financial planning advice based on simple rules of thumb may be helpful for those who currently take no systematic approach.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 81 (2012)
Issue (Month): 1 ()
Pages: 39-60

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Handle: RePEc:eee:jeborg:v:81:y:2012:i:1:p:39-60
DOI: 10.1016/j.jebo.2011.08.010
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