Many Americans lack proper planning in their retirement and later regret not saving more in their earlier years, not investing in long-term care or annuities, and withdrawing from their social security payments too early.
A recent paper from Wharton explores how widespread these concerns are and whether people are commonly retiring with insufficient savings.
Saving for the future
The researchers conducted a randomized control experiment on 1,764 respondents aged 50 and over. They expanded on previous research by exploring various financial regrets, including not saving enough, not purchasing Long Term Care insurance, claiming social security benefits too early, not purchasing lifetime income payments, becoming financially dependent on others, and retiring too early.
The study found that the majority of participants (57%) regretted not saving more, with significant percentages also regretting not buying LTC insurance (40%), delaying social security benefits (23%), not purchasing lifetime income payments (33%), depending financially on others (10%), and retiring too soon (37%).
According to the study, presenting individuals with objective data on their expected lifespan resulted in changes to their reported financial regrets. The research found that giving people information about their likelihood of survival increased the regret expressed about not buying long-term care by more than double, and also increased regret about not purchasing lifetime income by 2.4 times.
Financial regret
The authors found that older individuals often experience financial regret due to inaccurate estimations of their lifespan when making crucial financial decisions such as saving, claiming benefits, and purchasing insurance. An important implication is that providing people with accurate information about their longevity when making these decisions could prevent them from making mistakes and regretting them later in life.
The study also suggests that older adults could use such information to reevaluate their choices about long-term care insurance and annuities.
“Better understanding of these risk management tools could substantially strengthen financial resilience in old age,” the researchers explain.
Starting young
There are obvious advantages to starting young as this allows the power of compound interest to kick in. This makes it that much harder to retire at a reasonable age.
“It’s very important to save as much as you can,” the researchers explain. “What you don’t see, you won’t spend. Therefore, when your money is socked away in your retirement account, you will adjust your consumption naturally to the amount of money you see.”
Sadly, at the moment the authors believe there is a large amount of financial illiteracy about how Social Security works. Many individuals have a limited understanding that waiting to claim their Social Security benefits will result in receiving higher payments. However, the information on this topic could be improved.
The Social Security rulebook is over 2,000 pages long, making it difficult for the average person to fully comprehend. There is a need for improved financial literacy and simplification of the rulebook to help individuals make informed decisions.
Boosting financial literacy
One effective way to improve retirement readiness is to increase financial literacy in the workplace. Employers are recognizing the benefits of educating their employees to prevent financial difficulties such as debt collection calls at work.
Additionally, providing information about life expectancy is crucial for making informed decisions throughout one’s lifetime to ensure a secure nest egg in old age.
Furthermore, it is important to educate the younger generation, starting from high school or earlier, about budgeting, planning, uncertainty, and risk management for both their working years and retirement.
