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Spend more today: Using behavioural economics to improve retirement expenditure decisions

  • Blake, David
  • Boardman, Tom

This paper examines how behavioural economics can be used to improve the expenditure decisions of retirees. It identifies how accumulated assets can be used optimally throughout retirement to produce life-long income when required, to make provision for contingencies – such as unanticipated spikes in expenditure – and to optimize the size and timing of bequests. We do this using a SPEEDOMETER (or Spending Optimally Throughout Retirement) retirement expenditure plan which employs defaults within a choice architecture. At its simplest, the plan involves just four key behavioural nudges: (1) First, make a plan – ideally with, but if necessary without, an adviser; (2) automatic phasing of annuitization which is designed to tackle the aversion to large irreversible transactions and losing control of assets and so allows the greatest possible degree of flexibility in managing the run-down of retirement assets; (3) capital protection in the form of ‘money-back’ annuities which deals with loss aversion, i.e., the fear of losing your money if you die early; and (4) the slogan ‘spend more today’ which utilizes hyperbolic discounting to satisfy the human trait of wanting jam today and to reinforce the idea that ‘buying an annuity is a smart thing to do’.

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File URL: http://mpra.ub.uni-muenchen.de/34234/1/MPRA_paper_34234.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34234.

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Date of creation: Oct 2010
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Handle: RePEc:pra:mprapa:34234
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  1. Jeffrey R. Brown, 2003. "Redistribution and Insurance: Mandatory Annuitization With Mortality Heterogeneity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 17-41.
  2. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  3. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  4. Bodie, Zvi, 1990. "Pensions as Retirement Income Insurance," Journal of Economic Literature, American Economic Association, vol. 28(1), pages 28-49, March.
  5. Laurence J. Kotlikoff & Avia Spivak, 1979. "The Family as an Incomplete Annuities Market," NBER Working Papers 0362, National Bureau of Economic Research, Inc.
  6. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  7. Mullainathan, Sendhil & Brown, Jeffrey R. & Kling, Jeffrey R. & Wrobel, Marian Vaillant, 2008. "Why Don't People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," Scholarly Articles 2799056, Harvard University Department of Economics.
  8. Jonathan Skinner & Stephen P. Zeldes, 2002. "The Importance of Bequests and Life-Cycle Saving in Capital Accumulation: A New Answer," American Economic Review, American Economic Association, vol. 92(2), pages 274-278, May.
  9. Cassio M. Turra & Olivia S. Mitchell, 2004. "The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation," Working Papers wp086, University of Michigan, Michigan Retirement Research Center.
  10. Mariacristina De Nardi & Eric French & John Bailey Jones, 2006. "Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles," NBER Working Papers 12554, National Bureau of Economic Research, Inc.
  11. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  12. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 706-32, August.
  13. Thomas Leonard, 2008. "Richard H. Thaler, Cass R. Sunstein, Nudge: Improving decisions about health, wealth, and happiness," Constitutional Political Economy, Springer, vol. 19(4), pages 356-360, December.
  14. Amy Finkelstein & James Poterba, 2002. "Selection Effects in the United Kingdom Individual Annuities Market," Economic Journal, Royal Economic Society, vol. 112(476), pages 28-50, January.
  15. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119.
  16. Jeffrey R. Brown & James M. Poterba, 1999. "Joint Life Annuities and Annuity Demand by Married Couples," NBER Working Papers 7199, National Bureau of Economic Research, Inc.
  17. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  18. David Blake & Andrew J. G. Cairns & Kevin Dowd, 2003. "Pensionmetrics 2: stochastic pension plan design during the distribution phase," LSE Research Online Documents on Economics 24830, London School of Economics and Political Science, LSE Library.
  19. Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
  20. Mitchell, Olivia S. & Utkus, Stephen P. (ed.), 2004. "Pension Design and Structure: New Lessons from Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780199273393, March.
  21. Wolfram J. Horneff & Raimond H. Maurer & Michael Z. Stamos, 2008. "Optimal Gradual Annuitization: Quantifying the Costs of Switching to Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 1019-1038.
  22. Blake, David, 1996. "Efficiency, Risk Aversion and Portfolio Insurance: An Analysis of Financial Asset Portfolios Held by Investors in the United Kingdom," Economic Journal, Royal Economic Society, vol. 106(438), pages 1175-92, September.
  23. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  24. Constantijn W.A. Panis, 2003. "Annuities and Retirement Satisfaction," Working Papers 03-17, RAND Corporation Publications Department.
  25. Cannon, Edmund & Tonks, Ian, 2008. "Annuity Markets," OUP Catalogue, Oxford University Press, number 9780199216994, March.
  26. Tom Boardman, 2006. "Annuitization Lessons from the UK: Money-Back Annuities and Other Developments," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 633-646.
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