Spend More Today: Using Behavioural Economics to Improve Retirement Expenditure Decisions

Pensions Institute Discussions Paper No. PI-1014

43 Pages Posted: 1 Dec 2011

See all articles by David P. Blake

David P. Blake

City, University of London

Tom Boardman

affiliation not provided to SSRN

Date Written: October 27, 2010

Abstract

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’.

Keywords: Behavioural economics, Retirement, Annuities

JEL Classification: D91, G02, J26

Suggested Citation

Blake, David P. and Boardman, Tom, Spend More Today: Using Behavioural Economics to Improve Retirement Expenditure Decisions (October 27, 2010). Pensions Institute Discussions Paper No. PI-1014, Available at SSRN: https://ssrn.com/abstract=1964704 or http://dx.doi.org/10.2139/ssrn.1964704

David P. Blake (Contact Author)

City, University of London ( email )

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HOME PAGE: http://www.pensions-institute.org/

Tom Boardman

affiliation not provided to SSRN

No Address Available

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