Lifecyle Retirement Planning: Experimental Evidence

We report on a series of economic decision-making experiments exploring how individuals make lifecycle consumption plans when they face various different deterministic endowment profiles over their lifetimes. In some treatments, subjects face a decline in their endowment income during a retirement phase while in other treatments endowment income is constant over all periods of life or subjects receive a single lump sum endowment only at the first period of their life. In all treatments, the present value of lifetime income is the same and so is the optimal consumption path. We find that, regardless of the endowment profile, subjects generally over-consume relative to the optimum in the early periods of life. Consequently, they accumulate too little wealth and so they under-consume relative to the optimum in later periods of life. We also find that consumption is excessively sensitive to endowment income and that there is a drop in consumption during the retirement phase of life regardless of whether or not there is a decline in the endowment received during those periods. Our lifecycle consumption findings thus mimic those found in studies using field data and so we argue that the laboratory provides an empirically relevant and controlled environment in which to study lifecycle consumption plans and retirement savings behavior and to assess the role of policy interventions. Finally, we develop a behavioral model of consumption behavior that is a hybrid of the Keynesian current-income approach and the forward-looking permanent income approach. We show that our hybrid behavioral model is able to explain several puzzling consumption/saving patterns found in the experiment.