Friday, June 22, 2007

Retirement Planning and Behavior

Retirement Planning and Behavior

First and foremost, retirement planning is about how you approach the subject. It is for most of us, a sort of behavior modification. We want to do better. We plan to do better. But in the end, we often fail and there are numerous statistics to prove that to be true.

While reading about some other person's failures is far more entertaining, reading yourself into some of the studies I present in this section of the (as-yet-to-be-edited) book can be eye opening.

Sharon A. DeVaney, who is a Professor of Family and Consumer Economics, Department of Consumer Sciences and Retailing, Purdue University and Sophia T. Chiremba, Ph.D. candidate, Department of Consumer Sciences and Retailing, Purdue University co-authored a paper discussing the different types of savings habits titled Comparing the Retirement Savings of the Baby Boomers and Other Cohorts

In that paper, they reveal some interesting statistics about who we are and how we approach savings. For instance, Ms. DeVaney and Ms. Chiremba noted the following:

    There was at least one retirement account in 57 percent of the households. The average or mean amount in the retirement accounts was $49,944. The median amount held in retirement accounts was $2,000.
    About 34 percent of households preferred not to take any risk when saving or investing, while 39 percent would take average risk, and 27 percent would take above average or substantial risk.

    Free Image Hosting at

    The Swing cohort was the smallest group mentioned in the paper, representing just 14 percent of households. They wrote that "On average, respondents had completed about 13 1⁄2 years of education. Forty-six percent of the households had children aged 18 years or younger living in the home. Thirteen percent of the heads of household were self-employed. The average or mean household income of the sample was $72,673; the median household income was $44,000.

    Forty-four percent claimed that they had spent less than their income in the previous year, while 19 percent indicated that they had spent more than their income, and 37 percent reported that they had spent an amount equal to their income.

I mention several other studies in this section of the book including an update on what is known as "the Life-cycle Hypothesis", a suggestion that savings is determined by your age. Bracketed by younger people who borrow against future earnings and older folks who spend what they have saved, this hypothesis suggests that middle-aged people are most likely to save.

Icek Ajzen suggested something entirely different. He published a paper in 1985 that first appeared in an article titled “From Intentions to Actions: A Theory of Planned Behavior”. Mr. Ajzen believed that savings is determined by our approval rating among our peer group and the successes we may have had in the past.

To overcome that, we need to focus on what is not known, couple that with what is possible and soldier on without any notion of perceived gains. The possibility of a more comfortable future if we plan our retirement without the burden of our bad behavior is a huge but not insurmountable challenge.