City Research Online

Abstract

We portray the valuation of retirement savings in terms of a mental time travel journey in which a proposed contribution to a pension plan is projected forward to the plan member’s retirement date and this projected value is then discounted back to today, thereby giving a present or personal value. We set this within a broader framework of pension planning, which seeks to smooth consumption over the lifecycle. We explain how two psychological biases—exponential growth bias and present bias—can lead to a difference between the initial value of a pension contribution and its present value, such a difference reflecting an asymmetry between projection and discounting, and how such a difference might lead to inadequate retirement savings and hence to a lower than desired standard of living in retirement. We consider how the two biases might be mitigated.

Publication Type:	Article
Additional Information:	© 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).
Publisher Keywords:	retirement savings; lifecycle model; financial investment valuation; mental time travel; time perception; projecting; exponential growth bias; discounting; present bias; symmetric; asymmetric; valuation
Subjects:	B Philosophy. Psychology. Religion > BF Psychology H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance

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