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Spend More Today Safely: Using Behavioral Economics to Improve Retirement Expenditure Decisions With S PEED O ME T E R Plans
Author(s) -
Blake David,
Boardman Tom
Publication year - 2013
Publication title -
risk management and insurance review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 16
eISSN - 1540-6296
pISSN - 1098-1616
DOI - 10.1111/rmir.12007
Subject(s) - nudge theory , annuity , choice architecture , economics , actuarial science , behavioral economics , default , hyperbolic discounting , risk aversion (psychology) , behavioural economics , discounting , flexibility (engineering) , microeconomics , business , finance , expected utility hypothesis , financial economics , life annuity , pension , psychology , management , social psychology
This article examines how behavioral economics can be used to improve the spending decisions of retirees, using a S PEED O ME T E R (or S pending O ptimally T hroughout R etirement) retirement expenditure plan that employs defaults within a choice architecture. The plan involves just four key behavioral nudges: (1) first, make a plan—ideally by being auto‐enrolled into one or with the help of a financial 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 rundown of retirement assets; (3) capital protection in the form of “money‐back” annuities that deals with loss aversion, that is, the fear of losing your money if you die early; and (4) the slogan “spend more today safely” that 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.”