Saving motives and consumption

In this paper, we analyze how retired households decide on their total expenditures and to what extent they draw down their wealth. Respondents read descriptions of hypothetical couples with given annual incomes, health, financial wealth, and an own mortgage free home. In a first experiment, respondents are asked to advise an annual expenditure amount (constant over time) and to indicate which saving motives are important for this. We investigate how the choices vary with the extent to which pension income is annuitized and with expected future health. A second experiment allows for non-constant annual expenditures and varies pension income over time. We find that the average respondents are close to rational. On the other hand, we also find huge heterogeneity across respondents. This suggests that a substantial group is at risk to make choices that damage their welfare in old age. Policy focused on vulnerable groups seems hard to implement, because only a small part of the large heterogeneity is captured by observed characteristics. We therefore recommend restricting the freedom and complexity of choice in the pension domain and to increase possibilities for gaining independent financial advice.