11/21/16

Before Retiring, Take This Simple Test

By Shlomo Benartzi & Martin Weber, Oct. 26, 2016, Wall Street Journal

For some people, the prospect of getting an immediate reward is simply too difficult to resist. One of the most important financial decisions people make is when to retire. It’s also one of the worst decisions many people make. Specifically, they retire too early, resulting in serious financial shortfalls in old age.

The good news is that, according to a new study by Philipp Schreiber and Martin Weber at the University of Mannheim in Germany, there’s a simple two-question quiz that can help predict whether you’ll regret the timing of your own retirement. Here are the questions:

Question 1: You just learned that you are due a tax refund. If you’d like, you can get the $1,000 refund right away. Alternatively, you can get a $1,100 refund in 10 months. Which do you prefer?

Question 2: You just learned that you are due a tax refund. If you’d like, you can get a $1,000 refund in 18 months. Alternatively, you can get a $1,100 refund in 28 months? Which do you prefer?

The two questions are nearly identical. Each poses the same kind of choice. But the second question postpones the two options for delivery by 18 months, while the first offers an option for immediate delivery.

Time will tell

The point of the exercise is to measure the consistency of a person’s time preferences. Someone with consistent time preferences should answer both questions the same way—choosing the early option both times, or the delayed option both times. Such consistency is a requirement for making financial plans that you stick with.

Some people, however, choose inconsistently. They will take the larger tax refund if both refunds require a delay, as in the second question. But they choose to accept the smaller amount when it is available immediately, as it is in the first question. For these people, the prospect of getting an immediate reward is simply too difficult to resist.

The respondents with inconsistent answers exhibit a tendency known as present bias, or hyperbolic discounting. They strongly prefer rewards that arrive right away. While previous research has linked present bias to a lack of retirement savings, this new study, which tallied results from more than 3,000 Germans, shows that present bias can also lead people to retire before they are financially ready.

The researchers found that people who give the most inconsistent answers tend to retire significantly earlier (about 2.2 years on average) than those with consistent preferences. This leads to a roughly 13% reduction in their monthly benefits. Over time, these people are also far more likely to say they regretted the timing of their retirement.

Help steering

This research helps us better understand why people choose to retire early. It can also help us find ways to stop people from retiring too early. For instance, many workers now benefit from automatic savings programs that rely on default payroll deductions to help them save for retirement. These programs generally use a one-size-fits-all approach, recommending the same savings rate for all workers.

While these defaults have boosted savings for many Americans, they could be even more effective if they were personalized according to the results of the two-question quiz. Consider a person who exhibits a strong bias for receiving rewards in the present. Given the likelihood that she’ll be tempted by an early retirement, she might want to be defaulted to a higher savings rate during her working years. This will help her avoid future regret over the timing of her retirement decision, since she will have sufficient savings.

We can also redesign the Social Security enrollment process to minimize the possibility of regret. The program is structured so that you can start receiving payments at any time after the age of 62. However, the monthly payments will be larger for every month you delay signing up to receive benefits, at least until you turn 70. For instance, a person who can expect to receive $1,000 per month if they retire at 62 will see his benefits increase to approximately $1,750 per month if he can wait until he’s 70 before collecting.

A number of economists have argued that waiting for the larger payment is usually a much better deal. Nevertheless, most people aren’t willing to wait. According to an analysis by Alicia Munnell and Anqi Chen at Boston College, the most popular age, by far, to start Social Security is 62.

Fewer regrets

With the new research from Germany, we can come up with strategies to encourage better decisions. One approach is to ask people to estimate their preferred retirement age when they are still working. Because retirement benefits are far off, they probably won’t be tempted by the smaller/sooner amount and will likely predict an age well past 62. While this estimated age isn’t binding, it will allow Social Security to personalize communication with that person in a way that might reduce their future regret. (The monetary amount itself won’t change, just the way the options are presented.)

Let’s say, for instance, that a person stated a preferred retirement age of 70 during his working years. When presenting his retirement options, Social Security could describe the benefits he’d collect at 62 as a relative loss of approximately $750 per month, at least compared with the benefits he’d receive if he waited until his preferred retirement age. Such framing could make the possibility of starting benefits right away far less appealing.

Nobody wants to regret his or her retirement choices; many of these decisions cannot be undone. By identifying those workers who are planning for a late retirement but are likely to succumb to the temptation of an early one, we can take steps to prevent mistakes before they occur.

 To Your Successful Retirement!

 Michael Ginsberg, JD, CFP®

11/15/16

Your Fellow Passenger: Meet the Senior Traveler

By Airlines.org, October 20, 2016

Today’s air travel is more accessible than ever and our skies have never been more diverse. From first-time fliers to seasoned veterans, your next flight is sure to bring together different people from all over the world headed toward their next destination. We’d like to help you get to know a few of your fellow passengers. Throughout the year, we introduced you to the Road Warrior, the Family Travelers and the Millennial Travelers. Finally, we’d like to introduce you to the Senior Traveler.

People dream about it their entire lives—when the average workweek is no longer a factor, the world can be your oyster. And whether it’s the vacation to Italy they’ve always dreamed of or a trip to see their granddaughter’s first soccer goal, retirees depend on air travel to get them there. Sixty-six percent of Senior Travelers are enrolled in a frequent flyer program, so they can earn miles on every trip.

With a lifetime of adventure waiting around every corner, retired travelers are always looking forward to their next adventure. Almost a third of Senior Travelers were likely to fly for personal international travel in 2016 while 76 percent planned to fly for domestic personal travel.

With airfares down 6 percent in 2016 alone, on top of dropping 5 percent in 2015, there has never been a better time for retired travelers to take to the skies. That’s one of the reasons why almost 80 percent of travelers over the age of 55 are satisfied with their overall air travel experience.

Today’s Senior Travelers are a technologically savvy bunch, with more than 60 percent checking in for their flight on a desktop or mobile device.

With fewer time commitments, retirees are discovering their love for travel all over again. U.S. airlines give Senior Travelers the freedom to explore the world and experience the new adventures they’ll find there—especially if that new adventure includes being there to help your grandson take his very first steps.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

11/8/16

Looking For A Fun Job After Retiring

By Marie G. McIntyre, October 23, 2016, Tribune News Service

Q. Like many baby boomers, I plan to continue working after I retire. However, I would like to do something completely different. For example, I recently met a retired executive who found a job working for a boat dealership. He delivers new boats to their owners and demonstrates all the features.

Although starting over will undoubtedly be difficult, I am very energetic and have a lot of useful experience. I’m also prepared to take a significant pay cut. My problem is that I don’t know how to convey all this in a job application. How can I convince potential employers that I would be an asset to their business?

A. With compensation being less important, you are now in the enviable position of doing work for fun. Therefore, the first step is to determine what type of work you find appealing. Start by making a list of all your interests and hobbies and then brainstorm related employment possibilities.

Next, develop a plan for learning about jobs in your desired field. For example, your boat delivery buddy might have done research by attending boat shows, visiting dealerships or chatting with employees at a marina. Eventually, the people you meet along the way will become part of your job search network.

With a radical career change, networking will be your most valuable tool. Randomly submitting applications won’t be helpful because your background has no apparent connection to the jobs you want. On the other hand, a personal conversation will allow you to convey your character, motivation and sincere desire to learn.

Since your ultimate goal is to get hired, be prepared to provide a concise career summary, highlighting any relevant skills and experience. If it’s been awhile since you looked for work, take time to refresh your interviewing skills. And since this is part of your retirement, please remember to relax and enjoy the process.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®