Affect plays a major role in all financial decisions, and this role is especially striking in its implications for retirement planning. Although poor financial planning is an issue at any stage of life, it might be particularly problematic as people age. By the time adults are approaching their planned retirement age, they might find that, due to inadequate planning or major decreases in investment returns, their accumulated savings are not sufficient for comfortable living. In a slightly different scenario, adults might save adequately for a pre-estimated number of retirement years, but fail to account for unexpected longevity. Adults in either of these situations who are currently nearing their predicted retirement age require an immediate solution. There are two broad options: people might continue save at a consistent rate to fund the duration of retirement, although they will have to sacrifice their originally planned retirement age and continue to work for five additional years or more. This option, with the accompanying need for potential changes in investment allocation, is an increasing reality in the current US economic climate. However, older adults who prioritize the positive, including an idealized retirement, might not recognize the detrimental effects of retiring before age 70. As a second solution, older adults might choose to let someone else plan for them; they can purchase annuities that on the one hand guarantee income until the end of their lives, but on the other hand can be extremely expensive and can preclude the provision of inheritance for family members. The choice of an annuity usually is driven by uncertainty and risk-aversion, thus older adults, who might be less likely to experience uncertainty in general and with regard to financial planning, might be less likely choose this option. At issue in both cases are the age-related affective changes that can preclude the insight that is necessary to pursue either of these options. In order to minimize the damage of inadequate planning, both options are potentially reasonable in terms of assuring adequate retirement income. However, widespread adoption of these strategies will require additional education on several levels.
On the individual level, educating young adults about the risks of inadequate financial planning could be a prophylactic measure, as science shows that young adults are more likely to process novelty and uncertainty, are more attentive to potential negative outcomes and are more likely to make decisions to avoid projected future negative affect. Younger adults might even be willing to enter into voluntary arrangements that pool risks, much like mutual funds pool the risk of owning individual securities, although older adults might be less willing to pursue this avenue. Conversely, emphasizing the positive aspects of work (e.g. keeping the mind active, social interaction, steady income) for older adults could appeal to their preferential focus on positive experiences. Reframing the definition of work by normalizing a ‘down-shift’ from high-intensity to low-intensity work, or from full- to part-time work for older adults also could help in institutionalizing a more effective and pleasant yet lengthier transition from work into retirement. On a more general scale, nothing convinces people like their own experience. Effective educational campaigns might suggest that people imagine spending a week living as they would live everyday retirement life, on the income they can reasonably expect, and with the challenges of navigating boredom, the loss of job-related identity, efficacy and importance, and dependence on caregivers. Such simulation could bring home the challenges of living on a less-than-adequate income for an extended period of time.
Cultural factors broadly defined, such as traditions, norms and expectations on the family level or the institutional level, also play a role in the structure of financial decision making (e.g. Bellante and Green, 2004
). To the extent that family members willingly assume the responsibility of caretaking for older or extended family members, emphasizing the ways in which wise financial planning will better position the younger generation for education, home ownership, and their own retirement planning also might have a positive impact on financial decision making. In addition, emphasizing the ways in which working longer can make people feel better would be congruent with the positivity effect and could have an effect on perceptions of the desirability of this avenue. Also on this level, the culture of a given employer institution can have an effect on retirement behavior by helping to set the perceptions of financial planning. Such educational interventions can be implemented relatively easily and without additional cost to companies. For example, automatic enrollment in a 401(k) program that requires ‘opting out’ rather than ‘opting in’ (i.e. new hires are automatically enrolled) has been shown to significantly increase participation as well as the maintenance of the default contribution rate (Madrian and Shea, 2001
). In addition, employees who commit in advance to the allocation of part of their future salary increases toward retirement savings have been shown to participate in such a savings plan at high rates, remain enrolled, and significantly increase savings rates over as little as 40 months (Thaler and Benartzi, 2004
). Such institutional changes in the perceived norms for retirement planning would help decrease uncertainty around planning, and framing these choices as positive would be consistent with older adults’ emphasis on positive experiences.
Finally, on a policy level, an increase in the age at which workers can collect full Social Security benefits could shift societal expectations of the ‘normal’ retirement to an age more likely to provide sufficient income in retirement. According to one estimate, ~60% of those who retired at age 62 would have chosen to retire at age 64 if the early entitlement age (EEA) was raised to 64 (e.g. Gustman and Steinmeier, 2002
). In addition, an increase in the EEA would send a clear message to both workers and employers that they should revise their expectations about the earliest age at which ‘retirement’ should begin.4
In addition, it would be helpful to educate the public so that they feel the ‘pain of paying’ if they retire early; early retirement costs them important savings that they will need later. For example, based on the 2002 average wage index ($33
500) economists estimated that the assets needed for 21 years of 80% income replacement for an average earner retiring at age 67 were $66
900. The assets necessary for the same rate of income replacement for an average earner retiring at age 62 were $155
450 (Munnell et al., 2004
Now that the timing of retirement is largely determined by individual decisions, and financial decisions have been made even more complex by the current economy, understanding how affect influences retirement decision-making—and communicating reliable research findings to the public and policymakers—is critically important. Individuals and their family members need to be informed about the affective factors that too often drive crucial financial decisions. Given the significance of such factors, policymakers responsible for assuring reasonably secure retirements will also need to consider counter-weights, such as public education campaigns that appeal to affective decision-making, the promotion of retirement-age norms or defaults that partially or completely re-institutionalize the retirement process, or adjustments to public program rules, such as raising the earliest age at which adults can start collecting Social Security or access a 401(k) without penalty, that decrease the likelihood that individuals will jeopardize their well-being in retirement.
Financial decision making and financial security have become more complex and more uncertain than ever. Many adults have been forced to assume greater personal responsibility for making decisions that will indelibly impact their families and their futures. The personal stakes are high, and, in order to make sound financial decisions, people must use the tools at hand: the motivation provided by the feeling of uncertainty, the currently available information about planning, and realistic predictions about the future. Older adults who might not have planned adequately, or who suddenly might need to adjust their original plans due to the economic crisis, might be at particular risk for suboptimal financial planning. The very phenomena that are related to what we value as wisdom in older adults (c.f. Ardelt, 2003
; Meeks and Jeste, 2009
)—memory for the good events from the past, a bias toward the pleasant (or away from the unpleasant) in the present, and positive predictions about the future—put them at risk for being unable to live comfortably until the end of their lives. This risk is driven by a collection of age-related changes in affective processing, and information about the role of affect in financial decision making should be incorporated into initiatives aimed at enhancing financial planning on the individual, cultural and policy levels.