The Psychology of Decumulation Decisions During Retirement

Abstract

The problem of drawing down one’s savings in retirement is known as “decumulation” and is a topic of growing policy importance. This article is devoted to understanding the psychology inherent in decumulation decisions and to identifying policy options that may develop from those findings. We begin by describing key psychological inputs to these decisions, including self-control, temporal discounting, loss aversion, fairness, and psychological ownership. We then briefly review the current evidence testing those processes within particular decumulation domains. Finally, we offer five possible policy approaches for influencing decumulation decisions, including addressing financial literacy, providing defaults, encouraging precommitments, offering disclosures, and building customized decision support systems. These interventions differ according to individuals’ financial sophistication and allow policy makers flexibility in determining the level of support to provide.