Mental Accounting in Retirement using full buckets
Diane Garnick from TIAA; Chicago Booth
Date Written: February 27, 2017
Abstract
Mental Accounting is an important tool enabling us to make countless decisions each day. We code, categorize and evaluate our expenses using a system that we typically develop with our first paycheck. We routinely allocate some portion of our money to many buckets, and often over commit ourselves. 25% to housing, 25% to food, 25% to loans, and of course, another 50% to entertainment. We don't necessarily make the best decisions, but if we make a mistake we have time on our side.
Mental Accounting in Retirement involves a key change in mindset. Time is no longer on our side and (hopefully) our level of wealth is higher. Rather than allocate some funds to many buckets we propose fully funding one bucket before moving on to the next. This framework offers transparency into the age old question of how much guaranteed lifetime income each household needs while simultaneously offering savers insight into which goals they are on track to meet.
Keywords: Behavioral Finance, Mental Accounting, Mental Accounting in Retirement, Emotional Accounting, Lifetime Income, Psychological Biases, Behavioural Finance
JEL Classification: A10, D03, D10, D91