Rationality and Retirement: Mutually Exclusive?

No one lives forever. So why, 18 years into retirement, have individuals generally spent only 20% of their nest egg? Why, if people want to conserve their assets, do nearly half of Americans take Social Security benefits at the earliest possible age of 62 – receiving only about 70% of the full benefit available at age 67?1

Money and rationality don’t always mix, of course. That’s especially true with retirement. The issue is complex and uncertain and can trigger feelings of fear and anxiety that may interfere with rational decision-making.

One way to address these issues is for the industry – consultants, advisors, plan sponsors and asset managers – to apply insights from behavioral finance. We believe this could encourage smarter, more rational decisions as people enter retirement.

Indeed, behavioral insights have played an important role in helping people save for retirement. Automatic enrollment into company-sponsored retirement accounts and default investments such as target-date funds have jump-started asset accumulation and prompted use of more-disciplined investment strategies. These “nudges” transform a cognitive bias – inertia – from a negative to positive.

However, nudging individuals to make more rational decisions as they enter retirement will be more challenging. The decisions that one needs to make at or near retirement, which significantly affect one’s ability to enjoy the “golden years,” are arguably more complex than those made during the accumulation phase. Not only are these decisions complex in isolation, but the complexity is amplified because each decision is interrelated to all of the others, as we outlined in recent research. Indeed, key questions – such as when to take Social Security, how to invest assets, whether to buy an annuity and how quickly to spend savings over an unknown remaining lifetime – can befuddle the most sophisticated minds in finance, let alone individuals with modest savings and limited financial knowledge.

Here are four decisions where insights from behavioral finance may promote more rational decisions and help to improve retirement security for millions of Americans:


Our research indicates that individuals with average health and moderate affluence would likely be better off deferring Social Security benefits until age 70.

Nonetheless, about 90% of those eligible claim Social Security before the full benefit age of 67. Without doubt, there are rational reasons to take Social Security early – including poor health, limited financial resources, spousal considerations and concern over the survival of Social Security. Yet it is clear that the vast majority of individuals are not optimizing this decision.