National Institute Economic Review, 198, Oct 2006, 75-96
We examine the saving and insurance behavior of 386 Boston University (BU) employees who volunteered to receive financial planning based on a detailed life-cycle financial planning algorithm. The correlation between the saving and insurance prescriptions and the actual decisions made by BU employees is very weak in the case of saving and essentially zero in the case of life insurance. Many employees spend far more and save far less than they should, while some under-spend and over-save. The same holds for life insurance. The degree of under-insurance is particularly acute. Almost 13 percent of BU spouses who are secondary earners would experience a 40 per cent or greater drop in their living standards were their spouses to pass away in the near future. Another 13 per cent would experience a 20 to 40 per cent drop. Planning shortcomings are as common among high-income professors with significant financial knowledge as they are among low-income staff with limited financial knowledge. Two thirds of BU employees are not in a position to smooth their living standards without exceeding their debt limits.