Savings goals matter - Cognitive constraints, retirement planning, and downstream economic behaviors

57 Pages Posted: 10 Mar 2023 Last revised: 18 Feb 2024

See all articles by Zihan Ye

Zihan Ye

Zhejiang University of Technology

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Xiaopeng Zou

Zhejiang University

Shenglan Chen

Zhejiang University of Technology

Date Written: February 16, 2024

Abstract

We study how cognitive constraints relate to each distinct step of the planning and execution process for retirement, that is, individuals’ propensity to plan, savings goals set, and economic outcomes (wealth accumulation and portfolio choice). We find that different cognitive constraints play distinct roles: Higher advanced financial literacy (and quantitative reasoning ability) predicts a greater propensity to plan, while higher basic financial literacy and verbal cognition predict setting higher savings goals. Math-related abilities are not associated with savings goals in a systematic way. Furthermore, our evidence shows that the economic consequences of retirement planning depend on the earlier set savings goals. In comparison to non-planners, only planners with a higher savings goal (above the median) accumulate more wealth and are more likely to hold risky assets and private annuities. Our findings suggest that when crafting public policy to develop individuals’ retirement readiness, next to improving financial literacy, other targets could be to enhance cognitive skills and to support setting concrete savings goals by, for example, providing better access to planning relevant information and tools.

Keywords: Retirement planning, savings goal, financial literacy, cognitive abilities, economic behaviors

JEL Classification: D91, G51, G52, G53

Suggested Citation

Ye, Zihan and Post, Thomas and Zou, Xiaopeng and Chen, Shenglan, Savings goals matter - Cognitive constraints, retirement planning, and downstream economic behaviors (February 16, 2024). Available at SSRN: https://ssrn.com/abstract=4381333 or http://dx.doi.org/10.2139/ssrn.4381333

Zihan Ye

Zhejiang University of Technology ( email )

China

Thomas Post (Contact Author)

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Xiaopeng Zou

Zhejiang University ( email )

38 Zheda Road
Hangzhou, 310058
China

Shenglan Chen

Zhejiang University of Technology ( email )

China

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