Behavioral and Psychological Aspects of the Retirement Decision
Knoll, Melissa A. Z., Social Security Bulletin
The majority of research on the retirement decision has focused on the health and wealth aspects of retirement. Such research concludes that people in better health and those enjoying a higher socioeconomic status tend to work longer than their less healthy and less wealthy counterparts. While financial and health concerns are a major part of the retirement decision, there are other issues that may affect the decision to retire that are unrelated to an individual's financial and health status. Judgment and decision-making and behavioral-economics research suggests that there may be a number of behavioral factors influencing the retirement decision. The author reviews and highlights such factors and offers a unique perspective on potential determinants of retirement behavior, including anchoring and framing effects, affective forecasting, hyperbolic discounting, and the planning fallacy. The author then describes findings from previous research and draws novel connections between existing decision-making research and the retirement decision.
EEA earliest eligibility age
FRA full retirement age
JDM judgment and decision making
SES socioeconomic status
SSA Social Security Administration
Deciding when to retire may be one of the most important decisions an individual makes during his or her lifetime. Although the retirement decision occurs late in life, it can significantly affect an individual's well-being for many years. The majority of research about the retirement decision has explored the impact of health (for example, NIA (2007)) and economic status (for example, Gustman and Steinmeier (2002)) on individuals' decisions to retire.1 Not surprisingly, research has indicated that individuals in poor health, or whose loved ones are suffering from negative health conditions, retire earlier than those in better health (McGarry 2002). Additionally, individuals who enjoy a higher socioeconomic status (SES) tend to work longer than lower SES individuals (Li, Hurd, and Loughran 2008).2
While financial and health concerns are a major part of the retirement decision, there are other issues that enter into the retirement decision that are unrelated to an individual's financial and health status. Research in the areas of judgment and decision making (JDM) and behavioral economics suggests that there may be a number of behavioral factors that influence the retirement decision as well. Findings from previous JDM and behavioral-economics research offer a new perspective on the motivations underlying the retirement decision and may help generate strategies for overcoming some cognitive and emotional factors that can lead individuals to make suboptimal retirement decisions. Therefore, it is crucial that, in addition to the financial and health aspects of the retirement decision, policymakers and those in the position to guide the choices of future retirees understand the possible behavioral and psychological features of the retirement decision. In this literature review, I outline findings from JDM and behavioral economics research that can inform and broaden one's perspective on why individuals decide to retire when they do.
At age 62, the current earliest eligibility age (EEA) for receiving Social Security retirement benefits, life expectancy for the average man and woman is approximately 21.4 years and 23.8 years, respectively.3 This means that many individuals will spend more years in retirement than they did in school, clearly a nontrivial amount of time. Retirement trends have indicated that many individuals do, in fact, claim Social Security benefits at the EEA, or at some point before their full retirement age (FRA). An important thread uniting many of the issues discussed in this article, then, is the tendency for individuals to retire early, that is, before their FRA. However, because delaying claiming benefits results in an increased monthly benefit amount for the remainder of one's life (and the remainder of the lives of family members receiving survivor benefits), many researchers have argued that delaying claiming is almost always the optimal decision economically (Coile and others 2002). …