Your perspective on things greatly influences how you decide. Here’s a great letter to advisers from Elaine Floyd that illustrates this … good choices require proper perspective. I added emphasis to main points below.
I’m always amused when I read academic papers that draw conclusions from multiple studies that are obvious to anyone who lives in the real world. Empirical research, it’s called—as if controlled experiments described in stuffy language make the data more valid than your own observations of client situations and behavior. Financial advisors are really the best students of human behavior. You have your own little laboratory right there in your office, and on a daily basis are able to observe the attitudes, preferences, and motivations underlying decision-making and human behavior.
However, I did see some useful tidbits in a paper called Behavioral and Psychological Aspects of the Retirement Decision. In it, the author discusses several reasons why people make the retirement decisions that they do—many of them suboptimal—and how financial advisors and others in a position to influence retirees’ behavior might reframe options to elicit better choices.
For example, people tend to view the Social Security claiming decision in terms of gain or loss from a particular reference point. This is called the framing effect. When the decision is posed as a gain from that reference point—see how much more you’ll get if you delay—fewer people choose that option than when it is posed as a loss—see how much less you’ll get if you claim now. This goes along with previous research showing that losses hurt more than equivalent gains feel good. It suggests that we might try to shift our clients’ anchor points from age 62 to 70. Rather than showing them how much more they’ll get if they delay past age 62, let’s show them how much less they’ll get if they claim before 70. This is easy to do with the Savvy Social Security planning calculators. Just change the order in which you present claiming scenarios to start with the optimal scenario and work down.
Another way we might influence clients’ claiming decisions is through affective forecasting. This involves helping people imagine their future lives with either higher income (delayed retirement) or lower income (early retirement). The bad news is that studies have shown that people are terrible at this. When imagining working longer, for example, they tend to focus on the worst parts of working rather than the comfort and security they would have later on if they worked a few years longer. This causes them to 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.
There are several techniques for debiasing a person’s forecasts so they will have a more accurate picture of their future life in retirement. One is to get people thinking about retirement long before it happens. Studies have shown that when the reward is far in the future people will delay immediate gratification in order to attain it. But when the goal becomes closer people start chomping at the bit. The EBRI Retirement Confidence survey consistently shows a large group of people who retired sooner than they had previously expected to. In other words, in their 50s they might see 70 as a good retirement age, but when they get to 62 the rewards of retirement become magnified and they want them now.
One obvious remedy is to get people to start thinking about retirement earlier. Also employ commitment strategies. These have proven effective for situations requiring self control, as the sales of annual gym memberships every January attest. If a client age 55 commits to retiring at 70, he is more likely work longer and delay Social Security than if he waits until age 62 to start thinking about retirement age. A person who reaches age 62 without having committed to a later retirement age is more likely to succumb to the lure of immediate leisure and free money from Social Security (albeit reduced) than one who has previously committed to a later retirement age.
People are also susceptible to optimistic bias. This is where they are able to identify all the bad things that can happen, but they don’t really believe any of them ever will. Long-term care is the perfect example. Everybody knows somebody who needed long-term care in their old age, but most people think it will never happen to them. They don’t mind taking a smaller Social Security benefit at 62, because they don’t believe they will become cash-strapped later on.
One way to overcome optimistic bias is to take an outside view rather than an inside view. If they can’t imagine bad things happening to them, show them how bad things have happened to other people. Compile testimonials or narratives of people who didn’t plan well and who ended up strapped for cash or were forced to scale back their lifestyle because they retired too early. Ask clients to consider their own circle of friends and acquaintances for inspiration, either positive or negative. (My personal reminder is a friend who retired, sold her house, and claimed Social Security at age 62 in order to spend a year in London and then live out the rest of her retirement in Bellingham, WA, where I live. At 65 she now lives on meager Social Security income, is forced to work 20 hours a week at minimum-wage job she hates, and carefully counts her pennies and coupons whenever we go out. She is my greatest reminder of how one’s lifestyle can change in an instant once the paychecks stop coming in.)”