Cognitive Ability and Post-Retirement Asset Decumulation

29 Pages Posted: 6 Feb 2014

See all articles by Chris Browning

Chris Browning

Texas Tech University

Sandra J. Huston

Texas Tech University

Michael S. Finke

The American College

Date Written: February 4, 2014

Abstract

There is evidence that retirees are decumulating their assets very slowly or not at all. This behavior does not follow the normative framework of the life-cycle hypothesis (LCH). Decumulating in a manner that maximizes expected utility is a complex process that requires the estimation and input of multiple factors when analyzing consumption alternatives. As a result, the decumulation decisions of retirees may be impacted by their cognitive ability. Evidence suggests that cognitive ability is relevant to financial decisions and that the presence or absence of cognitive ability is important when considering choices in combination across multiple time periods. We find that both life-cycle factors and cognitive ability are significant predictors of the rate of asset decumulation, and that those with higher levels or cognitive ability are decumulating at a significantly higher rate. We also show that the level of cognitive ability influences the effects of expected longevity, market returns, and medical costs. While the estimates for these factors are consistent between those with high and low cognitive ability, there are significant differences in how the estimates are incorporated into the asset decumulation decisions of the two groups.

Keywords: cognitive ability, retirement, asset decumulation

JEL Classification: D12, D81, D91, H31

Suggested Citation

Browning, Chris and Huston, Sandra J. and Finke, Michael S., Cognitive Ability and Post-Retirement Asset Decumulation (February 4, 2014). Available at SSRN: https://ssrn.com/abstract=2390862 or http://dx.doi.org/10.2139/ssrn.2390862

Chris Browning (Contact Author)

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Sandra J. Huston

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

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