hYPERBOLIC DISCOUNTING

‘Preference for a smaller reward sooner than a larger reward later’

‘Buy now. Pay later.’ If you’ve ever wondered whether hyperbolic discounting works, here’s a good example. Why would anyone pay what are often very high rates of interest, rather than wait a little longer?

In drawdown, the lure of hyperbolic discounting, may make people take out too much income too soon.

action

Alert your clients to the risks of drawing down too much too soon:

  • Nearly 40% of Australians have exhausted their pension pot by age 75 and pension savings in the US typically last just 17 years.
  • If your clients think this couldn’t happen here, recent data from a UK insurer suggests, on average, drawdown clients are taking over 6% a year!
  • In contrast, sustainable drawdown income rates for the UK have been assessed as nearer 3% –  almost half as much!