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Behavioral & Psychological Aspects of the Retirement Decision

An important paper has recently released by the Social Security Administration called Behavioral and Psychological Aspects of the Retirement Decision. It delves into some of the non-financial reasons why people choose to retire when they do. Following are some highlights from the paper.

Many future retirees do not understand the interplay between claiming age and Social Security benefits. Even when they understand the claiming rules, many people claim benefits when it is not economically advisable to do so, as more than half of retirees claim benefits at 62. 

Retirees tend to anchor on ages that have some retirement significance. Why do so many people claim to be "burnt out" at work when they turn 62? Why not 60 or 64 or 68? It's because 62 is the age of eligibility for Social Security benefits. But what if they were to anchor on age 70 instead? Might they push through the burnout, as they would if it occurred at 55 or 60 when retirement clearly was not feasible?

People compare alternatives as either a gain or a loss from the point of reference. When the option to claim benefits at age 68 was framed as resulting in a monetary gain from an age-65 reference point, only 38% of survey respondents chose 68 as the preferred retirement age. But when retiring at 65 was framed as resulting in a monetary loss from the age-68 reference point, 57% chose 68 as the preferred age. This confirms the notion that losses hurt more than the equivalent gains feel good. It also suggests that we might flip our framing of scenarios that involve delaying benefits. Rather than telling clients how much more they'll have if they delay to 70, we might adopt 70 as a reference point and show them how much less they'll have by claiming benefits early. One of the reasons SSA has stopped using the breakeven framework to discuss claiming options with clients is that it was causing clients to claim at 62 so they could start out "ahead." By looking at projected income at specific ages in the future, and by showing them how much less they'll have by claiming at 62, the decision can be framed more accurately.

People do not make accurate predictions of their future emotions. Studies have shown that football fans tend not to be as happy for as long as they would expect after their favorite team wins a big game, nor do they tend to be as unhappy for as long as they would expect following their team's loss. Likewise, pre-retirees think retirement will make them happier for a longer period of time than is actually the case once the initial euphoria wears off and they become bored or miss their friends at work. Conversely, people who hate their jobs tend to overestimate how miserable they actually are, failing to consider upsides such as work perks and the steady paycheck which they now take for granted. In other words, people retire early both because they think working longer will be worse than it is and because they think life in retirement will be better than it is. The grass isn't always that much greener...

People tend to overweight the value of rewards they can receive right away. Studies have shown that when the opportunity to receive a reward (such as money or a prize) is relatively far in the future, people state their intentions to choose a longer, later reward. But as soon as the reward opportunity moves closer to the present, they tend to reverse their preferences and choose the smaller, sooner reward. The closer individuals are to their preferred retirement age, the more future income they are willing to sacrifice in order to retire sooner. In other words, they become more impulsive as they approach retirement. The obvious remedy to this, of course, is to start educate people sooner--at age 50 or 55. Although it is unrealistic pre-commit to a specific retirement age, the previous discussion about reference points suggests that simply having a retirement age in mind may affect retirement behavior.

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