A craving for certainty
Even if we know we cannot avoid uncertainty, we continue to pursue certainty.
Retirement planning. It’s one of the classic topics in behavioural economics: most people realize they should be saving (more) for their retirement, but the utility of spending the money now seems so much higher. Retirement is so far in the future that we find it hard to picture ourselves in that position. The technical terms used, myopia and present bias, exemplify what it is about. If you manage to resist these tendencies and put money away in a pot to fund your eventual retirement, you get some welcome peace of mind. But unfortunately, that is temporary. Once retirement is no longer in the distant future, a new dilemma presents itself — not between spending and saving, but between two very different ways of securing an income from that pot.
Simple and certain
In the UK, until 2015, prospective pensioners could take 25% of their pension savings as a tax-free lump sum, but they had to purchase an annuity with the balance — hand it over to an insurance company, which then pays you a regular amount of money, for as long as you live. Consequently, the advice that was widely given to pension savers was to derisk their portfolio by shifting investment from stocks to bonds in the last few years before retirement, to…