A recent Wall Street Journal article by Dan Ariely and Aline Holzwarth suggests that most people dramatically underestimate how much money they will need in retirement. Unfortunately, their headline conclusion is invalid, even though they rely on an important principle of behavioral economics.
The authors emphasize that detailed planning for spending in retirement is hard (we agree). People tend to underestimate how long they will live, and they are uncertain at best about what they will do in retirement and how much it will cost. Behavioral economics teaches us that we tend to do a poor job of imagining our future, especially if it’s distant. We aren’t very good at thinking about how long we will live, either. Read More