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To plan, or not to plan? Optimal planning and saving for retirement

Author

Listed:
  • Cottle Hunt, Erin
  • Neumuller, Seth
  • Shivdasani, Yashna
Abstract
A large percentage of U.S. households arrive at retirement with little or no financial wealth. Empirical evidence suggests that many of these households undertook little or no planning for retirement while young. We demonstrate how the decision to avoid planning and saving for retirement while young can arise as an optimal choice made by forward-looking, utility maximizing households facing an exogenous retirement date. In our model, boundedly rational households select the length of their planning horizon optimally each period, in addition to making an optimal consumption and saving decision. Planning is costly insofar as households must expend effort, cognitive or otherwise, to plan for the future. In a calibrated version of our model, the average household avoids planning and saving for retirement while young and, as a result, arrives at retirement with less than one-fifth of the wealth that they otherwise would have accumulated had they instead planned for their entire remaining lifetime, as in a standard life-cycle model.

Suggested Citation

  • Cottle Hunt, Erin & Neumuller, Seth & Shivdasani, Yashna, 2024. "To plan, or not to plan? Optimal planning and saving for retirement," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 39-65.
    • Handle: RePEc:eee:jeborg:v:224:y:2024:i:c:p:39-65
    DOI: 10.1016/j.jebo.2024.05.006
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    More about this item

    Keywords

    Planning; Retirement; Life-cycle model; Short-planning horizon;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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