Lying to Yourself

One of my favorite types of stories to write about is when people say one thing and do another. This gap between what economics call “declared preferences” (what you say you’ll do) and “expressed preferences” (what you actually do) does not necessarily constitute a lie. Sometimes we say we will do something with the full belief that we will do it. But as willing as the spirit may be, the flesh is often less so.

Today’s Wall Street Journal has a special section on retirement. One article contains a chart, with data derived from McKinsey & Co. research, showing the kind of things that pre-retirees expect they will do upon retiring, and then what they actually do once they retire. Here are the examples:

Will take on work upon retirement
Pre-retirees’ expectation: 36%
Retirees’ reality: 10%

Will significantly reduce discretionary spending
Pre-retirees’ expectation: 32%
Retirees’ reality: 10%

Will downsize home/relocate
Pre-retirees’ expectation: 31%
Retirees’ reality: 7%

Will take on home-equity loan/line or reverse mortgage
Pre-retirees’ expectation: 13%
Retirees’ reality: 13%

It is pretty telling that the only category in which the reality meets the expectations is the last one, in which people need to borrow money. But I am guessing that this match is a bit misleading. The 13% of people who expect they will leverage their house are probably not the same 13% who actually do leverage their house.

If I were a financial advisor, I would collect these and similar data in an effort to scare my clients into believing how capable they are of lying to themselves. They may not mean to lie, and they may have no idea they are lying. But just as people are bad at predicting how happy something will make them, they are probably just as bad at picturing how unhappy they will be once they are retired with less money than they planned on having.


MM01

Interesting.

"I can live on 70% or 80% of my pre-retirement income."

but

"they were living in retirement on 95% or more of their pre-retirement income."

How do they make up the 15%-25% difference? That's big. Considering the fact that not too many senior people in US starve to death, do they (I mean, you people) lie to yourselves again and save as if you will spend about 95% or more of what you spend now, while saying you think you will spend about 70-80% after retirement?

NeverLimp

Many people lie to themselves about how much risk they are willing to accept with their investments too. They have a "high" risk tolerance until their stocks fall 10-15%.

dpm

Following the same line of reasoning, you could argue that children are lying when they claim they want to grow up to be astronauts, rock stars, or presidents, since most of them don't go on to work in those occupations. I'd guess that most pre-retirees are being as truthful about their intentions *at the time* as school children are about theirs.

When the adults actually do retire and discover that they are or are not bored, do or do not have enough money, do or do not need all the space (for Christmas with the grandchildren, etc.), then they adjust their plans for the reality they've found themselves in, just as children adjust their plans when they realize that there are not quite enough astronaut, rock star, and president slots available for everyone.

3612

Sometimes we inadvertantly lie about ourselves and tell the truth about our neighbors-- according to contemperary archaeologist, William Rathje ("Rubbish: What Our Garbage Tells Us About Ourselves") homeowners tend to overestimate the amount they recycle, but when asked how much they think their neighbors recycle, they come much closer to the true figure.

Lisa McLeod

This describes my parents to a tee, when planning their retirement, they said:

"We won't spend as much, we won't need a cleaning person or all those take-out meals."

"I'll take on some consulting work"

"We're going to simplify, we just need a little house."

Flash forward 10 years later to a big lake house with a mortgage bigger than what they sold - room for all the grand kids -

A weekly cleaning women - who wants to spend their golden years keeping up with a big house -

Dinner out three nights a week - who wants to cook when you can go out with your friends -

No consulting work - who wants to put on a coat and tie and play the corporate game when you can be out burning gas on your boat.

Good thing they're in such a good mood about it, All I can say is thank god for short term memory loss, they continue to believe this is exactly what they planned for.

I'm glad they're so fun to be around, or I might be getting annoyed that they're burning through their cash faster than a drunk construction worker on Friday and I'll probably have to foot the bill for their nursing home in 10 years.

Ahh well, unrealistic expectations is a hallmark of humanity. If we had a firm grasp on reality most of us would run screaming into the street.

Read more...

Veda

#3 dpm, I don't agree that pre-retiring adults have such similar mentalities as young children about their futures. The kids just don't get the whole "dog-eat-dog" part of what it takes in life to make it into the careers of their choice. However, adults are more realistic, expecting to need to downsize, take on consulting work, etc, for balanced expectations of higher costs of living as time passes and being able to afford fewer of their typical luxuries otherwise.

I suspect the reason these plans aren't carried out more often are more likely due to that freedom-esque feeling #5 (Lisa) mentions. There comes a re-eval of what the luxuries really are and which of them one wants to maintain or how to add to them.

Otherwise, maybe it's just a simple fact of "planning for the worst" only to reap the benefits when the worst simply doesn't happen.

Or maybe it's a mentality based on the expectedly limited portion of life that is left and the desire to live it to the fullest.

Maybe I'll act like a little kid though and truly believe that I can do and be whatever I want in those years. I'm not there yet, so I can only speculate. (Might be fun to re-invent the self by then!)

Read more...

prosa

It could be that many retirees are pleasantly surprised at how well they're doing. Hence there's *no need* to reduce discretionary spending, seek part-time work, etc.

GamblingEconomist

It sounds pretty nice to me. A retirement without having to work, reduce spending, or downsize living conditions.

doherjo1

I think this says alot about generationals expectations and changing economics due to financial product innovation.

The BBs saw their parents go through a period of bleak prospects in retirement. They saw their parents depend upon the stae as well as scrimp. as a result, the current retirees had expectations of scaled down life in retirement.

along came financial innovations that have allowed people to monetize the equity in their homes as well as the proliferation of stock options and stock based retirement plans. This aforded the BBs to revise their expectations and as a result fewer realize what they had expected.

The scary thing is that this generation may watch how "easy" the BBs have it and this may prompt them to save less and live now. If we have a market crash due to BB cashouts, then this will be ruinous.

Veda

#9, doherjo1, I think you make an excellent point. But consider this:

Too many of the Boomers are running dry too quickly and many of those are not yet retired. The X-ers expect SSec to be sucked up by those Boomers and have been preparing to take care of their parents as well as prepping for their own retirements with zero SSec left for them when the time comes. It's more than a truckload of responsibility.

Why the Boomers are in such a position is just what you say, what they witnessed in the generation before them, of course, and how they've reacted.

The X-ers have already begun their reactions to the Boomers' example.

What the Y's will witness, on the surface, is this: two generations in a row that have it pretty decent overall, living out their own ideas of "comfort in retirement."

What the question becomes, I think, is will the Y-gens be aware of the ...work that the X-ers will have put in to earn their own comfy golden years and prepare accordingly or will they take two generations' worth of "comfy golden years" to suggest that it comes naturally, without effort?

So I think the point is a great one, but I wonder which generation will take the highest impact.

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editorguy

As post-Boomers, my wife and I are assuming that we will not reap ANY Social Security benefits at all when we retire 30 years from now, and we are investing accordingly. I wonder if this is common, or if it is a good assumption. Would love to get SD's take on it, too.

MM01

Interesting.

"I can live on 70% or 80% of my pre-retirement income."

but

"they were living in retirement on 95% or more of their pre-retirement income."

How do they make up the 15%-25% difference? That's big. Considering the fact that not too many senior people in US starve to death, do they (I mean, you people) lie to yourselves again and save as if you will spend about 95% or more of what you spend now, while saying you think you will spend about 70-80% after retirement?

NeverLimp

Many people lie to themselves about how much risk they are willing to accept with their investments too. They have a "high" risk tolerance until their stocks fall 10-15%.

dpm

Following the same line of reasoning, you could argue that children are lying when they claim they want to grow up to be astronauts, rock stars, or presidents, since most of them don't go on to work in those occupations. I'd guess that most pre-retirees are being as truthful about their intentions *at the time* as school children are about theirs.

When the adults actually do retire and discover that they are or are not bored, do or do not have enough money, do or do not need all the space (for Christmas with the grandchildren, etc.), then they adjust their plans for the reality they've found themselves in, just as children adjust their plans when they realize that there are not quite enough astronaut, rock star, and president slots available for everyone.

3612

Sometimes we inadvertantly lie about ourselves and tell the truth about our neighbors-- according to contemperary archaeologist, William Rathje ("Rubbish: What Our Garbage Tells Us About Ourselves") homeowners tend to overestimate the amount they recycle, but when asked how much they think their neighbors recycle, they come much closer to the true figure.

Lisa McLeod

This describes my parents to a tee, when planning their retirement, they said:

"We won't spend as much, we won't need a cleaning person or all those take-out meals."

"I'll take on some consulting work"

"We're going to simplify, we just need a little house."

Flash forward 10 years later to a big lake house with a mortgage bigger than what they sold - room for all the grand kids -

A weekly cleaning women - who wants to spend their golden years keeping up with a big house -

Dinner out three nights a week - who wants to cook when you can go out with your friends -

No consulting work - who wants to put on a coat and tie and play the corporate game when you can be out burning gas on your boat.

Good thing they're in such a good mood about it, All I can say is thank god for short term memory loss, they continue to believe this is exactly what they planned for.

I'm glad they're so fun to be around, or I might be getting annoyed that they're burning through their cash faster than a drunk construction worker on Friday and I'll probably have to foot the bill for their nursing home in 10 years.

Ahh well, unrealistic expectations is a hallmark of humanity. If we had a firm grasp on reality most of us would run screaming into the street.

Read more...

Veda

#3 dpm, I don't agree that pre-retiring adults have such similar mentalities as young children about their futures. The kids just don't get the whole "dog-eat-dog" part of what it takes in life to make it into the careers of their choice. However, adults are more realistic, expecting to need to downsize, take on consulting work, etc, for balanced expectations of higher costs of living as time passes and being able to afford fewer of their typical luxuries otherwise.

I suspect the reason these plans aren't carried out more often are more likely due to that freedom-esque feeling #5 (Lisa) mentions. There comes a re-eval of what the luxuries really are and which of them one wants to maintain or how to add to them.

Otherwise, maybe it's just a simple fact of "planning for the worst" only to reap the benefits when the worst simply doesn't happen.

Or maybe it's a mentality based on the expectedly limited portion of life that is left and the desire to live it to the fullest.

Maybe I'll act like a little kid though and truly believe that I can do and be whatever I want in those years. I'm not there yet, so I can only speculate. (Might be fun to re-invent the self by then!)

Read more...

prosa

It could be that many retirees are pleasantly surprised at how well they're doing. Hence there's *no need* to reduce discretionary spending, seek part-time work, etc.

GamblingEconomist

It sounds pretty nice to me. A retirement without having to work, reduce spending, or downsize living conditions.

doherjo1

I think this says alot about generationals expectations and changing economics due to financial product innovation.

The BBs saw their parents go through a period of bleak prospects in retirement. They saw their parents depend upon the stae as well as scrimp. as a result, the current retirees had expectations of scaled down life in retirement.

along came financial innovations that have allowed people to monetize the equity in their homes as well as the proliferation of stock options and stock based retirement plans. This aforded the BBs to revise their expectations and as a result fewer realize what they had expected.

The scary thing is that this generation may watch how "easy" the BBs have it and this may prompt them to save less and live now. If we have a market crash due to BB cashouts, then this will be ruinous.