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Retirement Spending Strategies to Maximize Happiness

Keys to making a sustainable financial plan and following it.

When it comes to making financial decisions, we’d all like to be perfectly rational. Alas, we’re human: We procrastinate, we are hypersensitive to losses, and we allow emotions to sway our decisions. Those traits may cause us to delay saving for retirement or hold on to a losing stock that we should have dumped years ago.

Behavioral economists such as Shlomo Benartzi, professor and co-chair of the behavioral decision-making group at the University of California Los Angeles Anderson School of Management, study the psychological issues that can undermine our decision-making and try to minimize their impact or even turn them to our advantage. In this lightly edited conversation with Senior Editor Eleanor Laise, Benartzi shared his thoughts on how behavioral economics can improve the lives of retirees.

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The typical retiree’s drawdown plan allows for the same level of spending year after year. You’ve suggested this may not be the best approach. Why is that?

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When consumption is smooth, people tend to habituate to their level of consumption. Research suggests that we can get more happiness from our retirement dollars when the amount we spend is varied over time.

How can retirees tweak their drawdown strategies to maximize their happiness—and minimize anxiety about running out of money?

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It’s important for financial advisers to work with clients so that their drawdown approach reflects their own individual preferences. For instance, surveys show that many people prefer a retirement drawdown with an upward slope, or gradually increasing their spending amounts. They like saving the best for last. Interestingly, this approach can also help people deal with the anxiety of running out of money, since they are spending less early in retirement.

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You’ve also suggested retirees could use a “spike” approach, spending larger amounts for short periods. What are the benefits of that?

The temporary increase in spending helps people escape the trap of habituation. They appreciate the additional spending precisely because it’s temporary. And the brief nature of the increase ensures that it won’t have a negative impact on their long-term finances. It’s not too late to live like a rich person, even if it’s only for a single month every year.

If retirees allow their annual spending to bounce up and down, how should they tame the risk of running out of money?

It’s all about making a sustainable financial plan and following it. While this might sound like a daunting task, new digital tools and interventions make it rather easy. For instance, I’m currently developing a NudgeBot that can offer people personalized advice based on their adherence to a given spending plan. Sometimes, the NudgeBot reminds you to take your grandkids to Disneyland—you’ve got a luxury month coming up. And sometimes it’s going to remind you to get a drip coffee instead of a latte at Starbucks, because you’ve been exceeding your monthly spend.

Are there other ways that digital “nudges” can be used to improve the lives of retirees?

One area I’m currently working on involves just-in-time financial education. In a pilot study that Yaron Levi of the University of Southern California and I conducted with users of [online financial-advice service] Personal Capital, we found that giving them easy access to their financial accounts via a smartphone app led to a reduction in discretionary spending around 15%. That’s a huge behavioral shift.

We need to develop and test digital interventions that can help everyone follow a sustainable spending and saving plan. Many of these solutions involve personalization, a digital tool that has already been widely adopted by successful technology companies, such as Netflix and Amazon. It’s time for the financial industry to catch up.

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