Retirement Saving: Don't Go With Your Gut

BOSTON (TheStreet) -- In the struggle to prepare Americans for retirement, government officials have focused on strategies such as automatic enrollment and products like annuities. Allianz , a global financial services company, took a different approach when the Department of Labor reached out to the public for guidance.

Allianz rounded up a team of behavioral finance experts to consider the role psychology in planning for retirement. Leading that effort was Shlomo Benartzi, co-founder of the Behavioral Finance Forum, a collective of prominent academics and financial institutions. Last month, the results of that effort were released in a report that was based on interviews with top psychologists, consumer behavior experts and behavioral economists.

"The human element is vital to understanding how retirees manage — or mismanage — their savings and critical to designing better solutions and policies." says Benartzi, who is also a professor at the University of California, Los Angeles.

As companies shift from pensions to 401(k) plans, workers must make more investment decisions as they save for retirement. The study found that retirees often make long-term decisions based on recent stock market performance, a dangerous strategy given that some of these decisions are irreversible.

Many retirees fail to calculate their potential expenses in retirement, spending too much during the early years and leaving too little for later. This can be especially damaging for women. Older women see a 47% drop in income following the death of their husbands and, as a result, about one in five widows ends up in poverty.

Post-retirement decisions are also frequently made amid increasing physical and mental deterioration. The report cites research by David Laibson, an economics professor at Harvard University, who estimates that half of people in their 80s suffer from dementia or cognitive impairment that's severe enough to impair their ability to make sound decisions.

Perception is also an obstacle. In the report, Jeffrey Brown, a professor at the University of Illinois, refers to the so-called "70% rule," which advises people to plan on spending 70% of their current income during their retirement. This simple rule has become popular among financial planners and their clients. But when the concept is reframed as the "30% rule," focusing on the expenditures eliminated, most people view it as unpalatable, even though the guidelines are identical.

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