People are retiring too early, short-circuiting their retirement savings and leaving them exposed to the possibility of running out of money once they've left the workplace.
However, there may be a way to fix that—or at least to cut down on the number of people who jump into retirement feet first without considering what it might cost them.
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MarketWatch recently ran a Wall Street Journal piece about a two-question quiz that can predict whether people will retire too early and end up with the short end of the stick on retirement funds.
People most likely to do so are what a study by Philipp Schreiber and Martin Weber at the University of Mannheim in Germany calls "time inconsistent" workers, who "decrease their planned retirement age with increasing age, since they are more and more tempted to retire early…. Time inconsistent participants on average plan to retire about 0.7 month earlier by each year that they get older."
The two questions are simplicity itself.
1. You just learned that you are due a tax refund. If you'd like, you can get the $1,000 refund right away. Alternatively, you can get a $1,100 refund in 10 months. Which do you prefer?
2. You just learned that you are due a tax refund. If you'd like, you can get a $1,000 refund in 18 months. Alternatively, you can get a $1,100 refund in 28 months. Which do you prefer?
The first question allows the worker to choose an immediate benefit, while the second question postpones both benefits, one for a longer period of time than the other.
People who choose the same type of answer consistently—either the early option in both cases, or the delayed option in both cases—indicates that they make financial plans that they stick to.
However, people who aren't consistent in their choices are found to retire significantly earlier than those who are consistent in their choices.
In addition, they exhibit something called "present bias" or "hyperbolic discounting" and find immediate (or less-delayed) rewards just too tempting to resist.
The study, which asked those questions of a pool of German workers, found that people with present bias tend to retire before their finances can support retirement.
But this can be changed, the report said, by reframing the questions asked of people about the Social Security enrollment process.
By presenting the choices (claim at age 62 and receive $1,000 per month; claim at age 70 and receive $1,750 per month) as a loss of $750 per month for taking the early option, it can make people rethink their tendency toward early gratification.
Other strategies can also capitalize on the study's findings. And that can help people to make the right decision, lessening their chances of a mistake that they'll regret for years to come.
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