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Cognitive Ability and Post-Retirement Asset Decumulation

Browning, Chris and Huston, Sandra J. and Finke, Michael S., Cognitive Ability and Post-Retirement Asset Decumulation (February 4, 2014). Available at SSRN:

“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.”

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