People make mistakes about their retirement due to a combination of insufficient planning as well as consumer behavior issues that retirement industry members can address, Suzanne Shu, a Cornell University marketing professor and researcher, said Tuesday.
"People aren't good at thinking about the future," said Ms. Shu, dean of faculty and research and professor of marketing at the Cornell S.C. Johnson School of Business.
She made her comments as the final keynote speaker at Pensions & Investments' three-day Defined Contribution East Conference in Orlando, Fla.
The subject of her speech to attendees was "Why so many retirees make the same mistakes?" One answer is that although members of the retirement industry were "on the same page" concerning accumulation of savings, "there's no one-size-fits-all" for decumulation, she said.
"Everybody is different," she said. "There are so many options and products."
Or, as she quoted the Nobel Prize-winning economist William F. Sharpe: Adequate spending in retirement is the "nastiest, hardest problem in finance."
A big mistake by participants is to confuse life expectation with longevity. She said most people think of retirement as a number — she used the example of someone investing in a 2030 target-date fund as figuring that was the year to retire. However, numbers can be misleading, or at least fail to tell the whole story, she said.
As an example, she pointed to a Social Security Administration interactive tool that allows people to predict how long they may live. If, for example, you plug in your current age of 65, the tool says the average life expectancy is 84.1 years.
But these are averages, said Ms. Shu, adding that there is a 13% probability that the 65-year-old could still be alive at age 95 — a significant implication for people trying to make sure they don't outlive their income. "Longevity isn't just a flag in the ground," she said.
Helping people address longevity risk can be as straightforward as how a person understands life after work, she said.
In an experiment by Ms. Shu and other researchers, people were asked their predictions about how long they would live. When asked if they will live to age 85, researchers found that 55% said yes. When asked what is the chance a person will die at age 85, researchers reported that 68% said yes. The gap in answers remained consistent — a median difference of 10 percentage points — over several age predictions.
Ms. Shu added that sponsors and advisers should encourage people to imagine their success stories on how they accumulated their savings and then reverse-engineer that thinking to help in spending their retirement balances. Members of the retirement industry also must realize that when people retire, they may be seeing more money — their account balances and Social Security — all at once than what they had seen before.
Participants also will be subject to multiple sources of uncertainty — such as longevity, health, the economy and children in college. Encourage participants to run scenarios on how these factors may affect retirement spending, she told the audience, and the earlier the better.
Behavioral research shows that people are less emotional when they are further removed from making a decision — another reason why retirement industry professionals should reach out early to participants, she explained.