What insights about retirement planning can we gain from a classic child psychology experiment involving marshmallows? Plenty! Let me explain.
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Decades ago, in what's now come to be known as the "Marshmallow Experiment," Stanford researcher Walter Mischel gave a group of three to five year-olds a choice: Eat one marshmallow now, or wait fifteen minutes and get two marshmallows. The experiment was intended to measure children's ability to delay gratification.
What did Mischel discover? About 30 percent of the children were able to wait fifteen minutes to get the second marshmallow; the rest gobbled it down before the time was up.
Stanford researchers followed up with these children over the years and found that as they got older, the children who could delay gratification were more likely to do well in school, have higher SAT scores, and obtain jobs; generally, they were more likely to succeed at life. Low-delayers, however, were more likely to have higher body-mass index measurements later in life, have problems with drug use and generally be less successful overall.
This YouTube video of toddlers grappling with this weighty dilemma can teach us a thing or two about delaying gratification. You'll see that the successful kids were able to distract themselves from the tempting marshmallow by singing to themselves, or covering their eyes, or playing hide-and-go-seek under the desk; they found some trick to delay eating the marshmallow. In short, they were sufficiently motivated to do whatever it took to get that second marshmallow.
So what does all this have to do with retirement planning? Quite a bit, actually. The fact is, almost half of all Americans start their Social Security benefits at age 62, which provides the lowest possible income. But if they could instead wait until age 70 to start receiving benefits, they could almost double their monthly income and increase their expected lifetime payout.
I understand that this may be easier said than done: When I've written about this topic in the past, I received numerous comments from many readers who challenged my reasoning to wait to start Social Security. Here's a summary of a few of those comments, along with my responses:
• "Take it now. After all, you never know when you'll die or what can happen in the future. Yes, it's true that you can never know what will happen, but if you have at least average health, it's more likely you'll boost your lifetime payout by waiting.
• "You didn't take into account the time value of money — you just compared total lifetime payouts in your analyses." If you consider the time value of money, you'll reach roughly the same conclusions.
• "I started taking Social Security early because I was in poor health." Or "...because I had a job that depressed me greatly." Or "...because I got laid off and couldn't find work and had no other recourse." If you have poor health or truly have no other recourse, these are valid reasons to start Social Security benefits early. Delaying benefits isn't for everybody.
Of course there are circumstances where drawing Social Security early might be the best choice. But I find it very hard to believe that half of all Americans fall into this category.
I think what's really happening with Social Security is that we're conducting a wide-scale version of the marshmallow experiment among older Americans, with roughly the same results as the experiments involving the children: People are learning that they don't have to wait and can instead take the money now.
The same phenomenon exists when employees are offered the option to take their payout in a defined benefit plan as a lump sum, rather than the lifetime monthly payout. Most people elect the lump sum so they can take the money now and not wait for those monthly payments to roll in.
This phenomenon is also evident with people who retire with 401(k) accounts. Most aren't withdrawing from these accounts with the goal of making the money last for a lifetime. Instead, they pull from their 401(k) accounts what they think they need now, without much regard for making their accounts last a lifetime.
I'll wager that the results of this wide-scale marshmallow experiment with retiring Americans will be the same as for the children: Most likely, the people who can delay gratification will have a more successful retirement.
How Can We Make Better Choices?
So how — and what — can we learn from the kids who were successful at waiting? First of all, the kids who were able to delay gratification made a commitment to themselves to wait for the second marshmallow. They still desired the marshmallow, as you can tell from the video, but they did whatever it took to distract themselves long enough in order to get more.
Mischel and his researchers were able to help the children obtain better results by teaching them some mental tricks, such as pretending that the marshmallow is just a picture, which made them able to wait the fifteen minutes. Another possibility that researchers are testing now is to use peer-pressure; show the subjects videos of kids who were able to wait.
Likewise, retiring Americans can make a commitment to make the best financial decisions for their future security. That might entail taking a part-time job that pays roughly what Social Security might provide immediately, thus giving you the ability to wait while your benefits grow.
You could also refocus your energy by taking the time to learn more about the ways to generate reliable, lifetime retirement income with the money that you already have. If you conclude that you're not good at delaying gratification, maybe buying an immediate annuity is one way to provide the financial discipline to generate a retirement income that will last for life. Like the children, don't dwell on the perceived advantages of grabbing the money now, but instead focus on strategies that enable you to make the best financial choices for your future.
And use peer pressure on yourself by seeking out people who are successful at managing their finances. Find out what they do, and how they've planned for a successful retirement.
I think the marshmallow experiment demonstrates that many us are hard-wired to make ineffective retirement planning decisions. However, I'm optimistic that with awareness of our challenges, and with some creative strategies and ideas, we can overcome our DNA and increase the chances of a successful rest-of-life.