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Mental Time Travel and Retirement Savings

Author

Listed:
  • David Blake

    (Pensions Institute and Finance Faculty, City, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK)

  • John Pickles

    (Pensions Institute and Finance Faculty, City, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK)

Abstract

We portray the valuation of retirement savings in terms of a mental time travel journey in which a proposed contribution to a pension plan is projected forward to the plan member’s retirement date and this projected value is then discounted back to today, thereby giving a present or personal value. We set this within a broader framework of pension planning, which seeks to smooth consumption over the lifecycle. We explain how two psychological biases—exponential growth bias and present bias—can lead to a difference between the initial value of a pension contribution and its present value, such a difference reflecting an asymmetry between projection and discounting, and how such a difference might lead to inadequate retirement savings and hence to a lower than desired standard of living in retirement. We consider how the two biases might be mitigated.

Suggested Citation

  • David Blake & John Pickles, 2021. "Mental Time Travel and Retirement Savings," JRFM, MDPI, vol. 14(12), pages 1-13, December.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:12:p:581-:d:694133
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    References listed on IDEAS

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    Cited by:

    1. David Blake, 2022. "Nudges and Networks: How to Use Behavioural Economics to Improve the Life Cycle Savings-Consumption Balance," JRFM, MDPI, vol. 15(5), pages 1-17, May.

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