Present and Future Selves Do Battle

Squared Away keeps hammering away at this point in various ways, because it seems so central to our financial well-being: we can’t fully relate to our future selves, which makes it difficult to save money.

This is the psychologist’s take on what mainstream economists would call “discounting” the future – that is, the future is less important than what’s going on today. Buying a new pair of shoes or an ice cream cone is a lot more fun than saving money for a future utility bill or a distant retirement date.

In this humorous Ted video, London Business School professor Dan Goldstein explains that all humans are engaged in an “unequal battle” between our present self (the consumer) and our distant self (the saver).

“The future self doesn’t even have a lawyer present,” he said. Goldstein entertains as he proposes ways to intervene in our inner battle.Learn More

A hand writing complex formulas on a chalk board.

The Mathematics of Longevity

Thanks to modern medicine, Americans’ longevity increased by 30 years during the 20th Century. During that time, the retirement age plunged, a byproduct primarily of a prosperous post-World War II economy.

An urgent need to squeeze more retirement money out of fewer years of work is now bearing down on the baby boom generation. But we haven’t adapted our lives or plans to fill in that yawning gap. Retirement today can last 20, even 30 years. The challenge of funding retirement is greatest for women, who earn less than men and live longer.

Steve Sass, my colleague at the Center for Retirement Research (CRR) at Boston College, encourages people to think about it this way and proposes a solution. For someone who works 40 years, retirement could last 20 years. That’s a 2-to-1 ratio of work-to-retirement years – with that ratio, it’s tough to make the financials work. It’s even harder if one’s retirement lifestyle will be based on those larger, late-career paychecks.

For those who have a job, consider what happens by adding five years of work. The work-to-retirement ratio is a “more manageable” 3-to-1, said Sass, who is co-author, with CRR Director Alicia Munnell, of “Working Longer: The Solution to the Retirement Income Challenge.”

That’s not all. Instead of retiring at age 62, an additional five years of work results in 44 percent more in your monthly Social Security check.Learn More

Jobless Benefits Delay Disability Filings

Photo by John E. Allen, Inc. Source: Franklin D. Roosevelt Presidential Library and Museum.

In New York, prosecutors recently charged 11 people with illegally collecting disability checks – some were caught playing tennis or golf or shoveling snow.

Boston’s mayor called “disappointing” a jury acquittal last summer of a hulky firefighter who was filmed posing during bodybuilding competitions – while on city disability.

Sensational news stories add to the stigma around people who collect disability for legitimate health reasons. New research on the Social Security Disability Insurance program provides insight into what really motivates people to file. There are two opposing ways to interpret these interesting findings, but more about that later.

Matt Rutledge, my colleague at the Center for Retirement Research, specifically researched disability filings by people who are unemployed in a new study for the Retirement Research Consortium. His work is particularly relevant at a time when the duration of joblessness has soared. Applications for disability typically increase in economic downturns, but they reached record highs in response to the Great Recession. …Learn More

Readers: Long-Term Care Policies Costly

One intention in introducing Squared Away this year was that it would become a forum for readers to share views about financial behavior, psychology, decision-making, products, education, and culture.

Some articles have been more successful than others in generating readers’ comments in the space provided at the end of each post. A post last week, “Long-Term Care: To Buy or Not to Buy,” was notable for the heat it generated.

It provided reasons the vast majority of the elderly do not purchase long-term care coverage from an insurance company. While the article, based on academic research, was about personal decision-making, readers focused on problems with the policies themselves:

Samantha Price noted:

Firstly, they are very expensive, so no one should be surprised why so many people are not buying. Secondly, many of the more affordable policies are issued by below-quality insurers, who have already shown their unreliability by being unable to pay their policyholders.

VG replied: …
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A messy desk covered with pens, pencils, paper, and coffee stains.

Are You Conscientious?

In a recent study of five personality traits, conscientiousness was the strongest determinant of an individual’s financial well-being.

Angela Lee Duckworth at the University of Pennsylvania and David Weir at the University of Michigan compared how people did on a personality test with their financial well-being after age 50. They examined the Big Five traits: conscientiousness, emotional stability, agreeableness, extroversion, and openness to experience.

Their finding about the power of conscientiousness adds to a spate of research combining psychology and economics to predict why people earn more, save more, or prepare for retirement. In another study, Australian researchers found that a child’s level of self-control, as early as age 3, can predict whether he or she will experience financial problems later in life.

So, what is conscientiousness and do you have it? I could tell you about it, but watch the video interview of Duckworth instead, on the University of Michigan Center for Retirement Research’s website.

Hint: is your desk clean?

Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.

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Credit Card Use Declines Among Students

Average college loans owed by the class of 2010 surged to $25,250 last year, up 5 percent from class of 2009 balances and up 35 percent from 2004, the Project on Student Debt reported today.

But let’s take a moment to thank Congress for doing something well: helping college students ward off another source of debt troubles, credit cards.

Since the federal Credit Card Act of 2009 restricted card issuers’ once-easy access to students, their credit card balances have dropped to $811, on average, from a record $3,173 in 2009, according to student lender Sallie Mae. Forty percent of college students currently have credit cards, down from 84 percent.

Sallie Mae said the 2009 and 2011 surveys were based on slightly different populations and are difficult to compare. But a downward trend is what the undersecretary of the Massachusetts Office of Consumer Affairs, Barbara Anthony, has also observed when she tours college campuses. Three years ago, a roomful of hands would go up when she asked who had a card. Today, it’s “definitely a minority,” she said.

The drop in card use “was absolutely due to the act,” she said. …Learn More

Three cartoon piggy banks.

One Savings Goal Better Than Many

Saving money. No financial behavior is more important in this era of DIY retirement planning. And yet few things are more difficult for more people.

To prod low-income people to save a little, foundations and the government design clever financial products or incentives – some work, some don’t. Academic researchers divine psychological tricks or behavioral mechanisms that might spur saving. Automatic enrollment in employer-supported 401(k)s is one such success story.

A different solution to the savings conundrum comes from two marketing professors at the University of Toronto. Experimenting on subjects around the world – residents of a small town in India, Canadian college students, parents in Hong Kong – they found that individuals are more successful savers if they identify and work toward a single goal. Setting multiple, competing goals – college, retirement, summer vacation, a new kitchen, and the Christmas fund – was less effective and even counterproductive.

“When people have multiple goals, they cannot decide which one is more important,” said author Min Zhao, whose paper with Dilip Soman is forthcoming in December’s Journal of Marketing Research. “They say, ‘I cannot decide. Maybe I’ll just do this later, and I might not do anything.’ ” …Learn More