Skip to main content
SpringerLink
Log in

Cognitive Ability and Post-Retirement Asset Decumulation

  • Original Paper
  • Published:
Journal of Family and Economic Issues Aims and scope Submit manuscript

Abstract

Post-retirement asset decumulation decisions are complex and may be affected by cognitive abilities. Estimating uncertainties such as life expectancy and medical costs, and incorporating them effectively into decumulation decisions may be especially difficult as retirees face age-related changes in cognition. This may result in rates of decumulation that are contradictory to the goals that motivated accumulation, leading to potentially large utility losses. We investigated the relevance of cognitive ability to asset decumulation decisions within our sample. We found that cognitive ability was a significant predictor of the rate of asset decumulation, and that those with lower levels of cognitive ability were decumulating at a significantly lower rate. We also showed that the level of cognitive ability influenced the effects of expected longevity, market returns, and medical costs. While the estimates for these factors were consistent between those with high and low cognitive ability, there were significant differences in how the estimates were incorporated into the asset decumulation decisions of the two groups.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. We make no attempt to model the LCH as a perfect predictor of decumulation decisions, and recognize that factors not included in our life-cycle framework may be relevant to how retirees decumulate their assets. We do however believe that the life-cycle factors included in our model are central to asset decumulation decisions and provide evidence of this in our regression analysis.

  2. Data collected in the CAMS surveys represents consumption and spending from the previous year. Therefore the information collected in the 2009 CAMS survey represented 2008 consumption.

References

  • Agarwal, S., Driscoll, J., Gabaix, X., & Laibson, D. (2009). The age of reason: Financial decisions over the lifecycle and implications for regulation. Brookings Papers on Economic Activity, 40(2), 51–117. Retrieved from http://www.jstor.org/stable/25652729.

  • Agarwal, S., & Mazumder, B. (2013). Cognitive abilities and household financial decision making. American Economic Journal: Applied Economics, 5(1), 193–207. doi:10.1257/app.5.1.193.

    Google Scholar 

  • Ando, A., & Modigliani, F. (1963). The life cycle hypothesis of saving: Aggregate implications and tests. The American Economic Review, 53(1), 55–84. Retrieved from http://www.jstor.org/stable/1817129.

  • Bernheim, B. D. (1987). Dissaving after retirement: Testing the pure life cycle hypothesis. In Issues in pension economics (pp. 237–280). Chicago, IL: University of Chicago Press. Retrieved from http://www.nber.org/chapters/c6861.pdf.

  • Bucher-Koenen, T., & Ziegelmeyer, M. (2011). Who lost the most? Financial literacy, cognitive abilities, and the financial crisis. (Working Paper No. 1299). European Central Bank. http://dx.doi.org/10.2139/ssrn.1738368.

  • Cattell, R. B. (1987). Intelligence: Its structure, growth and action. Amsterdam: Elsevier.

    Google Scholar 

  • Christelis, D., Jappelli, T., & Padula, M. (2010). Cognitive abilities and portfolio choice. European Economic Review, 54(1), 18–38. Retrieved from http://www.sciencedirect.com/science/article/pii/S0014292109000579.

  • Cole, S. A., & Shastry, G. K. (2009). Smart money: The effect of education, cognitive ability, and financial literacy on financial market participation. Boston, MA: Harvard Business School.

    Google Scholar 

  • Davies, J. B. (1981). Uncertain lifetime, consumption, and dissaving in retirement. The Journal of Political Economy, 89(3), 561–577. Retrieved from http://www.jstor.org/stable/1832042.

  • De Nardi, M., French, E., & Jones, J. B. (2009). Life expectancy and old age savings. (Working Paper No. w14653). National Bureau of Economic Research. doi: 10.3386/w14653.

  • De Nardi, M., French, E., & Jones, J. B. (2010). Why do the elderly save? The role of medical expenses. The Journal of Political Economy, 118(1), 39–75. Retrieved from http://www.jstor.org/stable/10.1086/651674.

  • Epstein, S. (1994). Integration of the cognitive and the psychodynamic unconscious. American Psychologist, 49(8), 709–724. doi:10.1037/0003-066X.49.8.709.

    Article  Google Scholar 

  • Frederick, S. (2005). Cognitive reflection and decision making. The Journal of Economic Perspectives, 19(4), 25–42. doi:10.1257/089533005775196732.

    Article  Google Scholar 

  • Glisky, E. L. (2007). Changes in cognitive function in human aging. In D.R. Riddle (Eds.), Brain aging: models, methods, and mechanisms (pp. 3–20). Boca Raton, FL: CRC Press. Retrieved from http://dx.doi.org/10.1201/9781420005523.sec1.

  • Gupta, A., & Li, Z. (2013). Optimal annuity purchase decisions under uncertain lifetime. Journal of Family and Economic Issues, 34(4), 447–459. doi:10.1007/s10834-012-9340-1.

    Article  Google Scholar 

  • Haiter, S., Hurd, M., Reardon, E., & Williamson, S. (2000). Patterns of dissaving in retirement. Retrieved from http://assets.aarp.org/rgcenter/econ/2000_10_dissaving.pdf.

  • Hershey, D. A., & Jacobs-Lawson, J. M. (2012). Bridging the gap: Anticipating shortfalls in future retirement income. Journal of Family and Economic Issues, 33(3), 306–314. doi:10.1007/s10834-012-9281-8.

    Article  Google Scholar 

  • Hung, A., Meijer, E., Mihaly, K., & Yoong, J. (2009). Building up, spending down: Financial literacy, retirement savings management, and decumulation. (Working Paper No. WR712). RAND Corporation. Retrieved from http://dx.doi.org/10.2139/ssrn.1520203.

  • Hurd, M. D. (1987). Savings of the elderly and desired bequests. The American Economic Review, 77(3), 298–312. Retrieved from http://www.jstor.org/stable/1804096.

  • Hurd, M. D. (2002). Are bequests accidental or desired? (Working Paper No. DRU3010). RAND Corporation. Retrieved from http://www.rand.org/pubs/drafts/DRU3010.html.

  • Kim, E. J., Hanna, S. D., Chatterjee, S., & Lindamood, S. (2012). Who among the elderly owns stocks? The role of cognitive ability and bequest motive. Journal of Family and Economic Issues, 33(3), 338–352. doi:10.1007/s10834-012-9295-2.

    Article  Google Scholar 

  • Korniotis, G. M., & Kumar, A. (2011). Do older investors make better investment decisions? The Review of Economics and Statistics, 93(1), 244–265. doi:10.1162/REST_a_00053.

    Article  Google Scholar 

  • Lusardi, A. (2008). Financial literacy: An essential tool for informed consumer choice? (Working Paper No. w14084). National Bureau of Economic Research. doi: 10.3386/w14084.

  • Lusardi, A., & Mitchell, O. S. (2011). Financial literacy and planning: Implications for retirement wellbeing. (Working Paper No. w17078). National Bureau of Economic Research. doi: 10.3386/w17078.

  • Mirer, T. W. (1979). The wealth-age relation among the aged. The American Economic Review, 69(3), 435–443. Retrieved from http://www.jstor.org/stable/1807378.

  • National Center for Health Statistics. (2011). Health, United States, 2010: With Special Feature on Death and Dying. Hyattsville, MD. Retrieved from http://www.cdc.gov/nchs/data/hus/hus10.pdf.

  • Peters, E., Hibbard, J., Slovic, P., & Dieckmann, N. (2007). Numeracy skill and the communication, comprehension, and use of risk-benefit information. Health Affairs, 26(3), 741–748. doi:10.1377/hlthaff.26.3.741.

    Article  Google Scholar 

  • Rypma, B., Prabhakaran, V., Desmond, J. E., & Gabrieli, J. D. (2001). Age differences in prefrontal cortical activity in working memory. Psychology and Aging, 16(3), 371. doi:10.1037//0882-7974.16.3.371.

    Article  Google Scholar 

  • Salthouse, T. (2005). Effects of aging on reasoning. In K. J. Holyoak & R. G. Morrison (Eds.), Cambridge handbook of thinking and reasoning. Cambridge: Cambridge University Press. doi: 10.2277/0521531012.

  • Salthouse, T. (2010). Executive functioning. In D. C. Park & N. Schwarz (Eds.), Cognitive aging: A primer (2nd ed.). New York, NY: Psychology Press.

    Google Scholar 

  • Smith, P., & Love, D. (2007). Measuring Dissaving Uut of Retirement Wealth.,. doi:10.2139/ssrn.968431.

    Google Scholar 

  • Tsang, P. S. (1998). Age, attention, expertise, and time-sharing performance. Psychology and Aging, 13(2), 323. doi:10.1037/0882-7974.13.2.323.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Personal Financial Planning, Texas Tech University, 15th Street and Akron, Lubbock, TX, 79409, USA

    Chris Browning, Sandra Huston & Michael S. Finke

Authors
  1. Chris Browning
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sandra Huston
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Michael S. Finke
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Chris Browning.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Browning, C., Huston, S. & Finke, M.S. Cognitive Ability and Post-Retirement Asset Decumulation. J Fam Econ Iss 37, 242–253 (2016). https://doi.org/10.1007/s10834-015-9453-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10834-015-9453-4

Keywords

Search

Navigation