Mental accounting is an aspect of behavioral economics relating to spending and saving where people maintain nonfungible mental accounts to organize and control their spending. This article compares the mental accounting approach to retirement savings to the traditional approach when dealing with a negative shock. The high incidence and large amounts of preretirement withdrawals from pension accounts in the United States runs counter to mental accounting, and is an important issue for financial service professionals advising 401(k) participants. In preparing for retirement, many U.S. workers, because of the weak social safety net and their small amounts of savings, need to use defined-contribution pensions, such as 401(k) plans and individual retirement accounts, as piggy banks when facing liquidity problems.
Author: John A. Turner, PhD, is director of the Pension Policy Center, Washington, DC. He has published more than 100 articles on pensions and retirement. He received an award for the best article of the year in the Journal of Risk and Insurance. Dr. Turner has a PhD in economics from the University of Chicago.
Author: Bruce W. Klein, PhD, has been a senior research economist at the Pension Policy Center, Washington, DC, since 2011. While there he has worked on studies concerning older workers, pensions, and retirement. Dr. Klein was a senior research associate at the College of William and Mary and adjunct associate professor at George Washington University.
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