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Life Health > Long-Term Care Planning

Regret Is a Powerful Savings, Planning Motivator: New Study

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What You Need to Know

  • Providing people with objective longevity information alters their self-reported financial regrets.
  • Longevity information provision can be a potent, as well as cost-effective, method of alerting people to retirement risk.
  • By confronting their fears and regrets, investors can significantly improve their current and future financial standing.

Some 60% of older survey respondents express regret for not having saved more during their working years, according to a new analysis published by the National Bureau Of Economic Research.

The authors of the analysis are Abigail Hurwitz, of the Hebrew University of Jerusalem, and Olivia Mitchell, of the University of Pennsylvania. According to the duo, this widespread regret about inadequate saving is an unfortunate, unavoidable reality for many Americans, but it also presents an opportunity for financial planning professionals to broadcast the importance of longevity risk and guaranteed income.

In fact, using a controlled randomized experiment conducted on nearly 1,800 respondents age 50 and older, Hurwitz and Mitchell show that providing people “objective longevity information” can significantly alter their self-reported financial regret.

Specifically, giving people such information more than doubled the amount of regret expressed about not having purchased long-term care coverage or lifetime income.

Armed with this data, Hurwitz and Mitchell propose that providing longevity information can be a potent, as well as cost-effective, method of alerting people to key retirement risks.

Details of the Analysis

To determine how a lack of understanding drives poor financial decision-making, Hurwitz and Mitchell analyze how longevity expectations shape financial regret in later life using an experimental module previously designed and fielded as part of the Health and Retirement Study, a well-known longitudinal panel study of approximately 20,000 people in America.

The module has researchers separate respondents into three groups. To start, the control group is not asked nor informed about either subjective or objective longevity information prior to taking the regret survey. Next, the two other groups are asked to discuss their perceived (i.e., subjective) survival probabilities, with one group then taking the survey. Finally, the last of the three groups, prior to taking the survey, is informed about the objective longevity risk they face, based on relevant survival tables used by actuarial professionals.

With the groups thus arranged, the researchers then assessed whether the respondents reported regret regarding the financial decisions made at younger ages, with a concentration on their prior decisions regarding savings, insurance, financial dependency and benefit claiming ages.

According to Hurwitz and Mitchell, the results reveal that many in the older population experience high levels of financial regret.

Specifically, 57% of participants report regretting not having saved more. A smaller but sizable group (40%) regrets not buying long-term care insurance, while 23% regret that they did not delay claiming Social Security benefits and 33% regret not having purchased lifetime income payments. Other findings show 10% express regret for having to depend financially on others, while 37% regret not working longer.

Key Findings and Caveats

According to Hurwitz and Mitchell, a deeper dive into the data across the three groups demonstrates how providing individuals with objective life table information makes a significant difference in their outlook. Most importantly, respondents shown objective survival probabilities expressed twice as much regret about not having purchased long-term care insurance and 2.4 times greater regret for not having purchased lifetime income payments, compared with the control group.

Hurwitz and Mitchell say their analysis shows “important population heterogeneity” when it comes to the role of objective longevity information and the expression of regret. For example, self-reported “healthy” people given objective longevity information were 43% more likely to express regret about not having saved more, according to the authors.

On the other hand, the act of drawing people’s attention to longevity actually seemed to reduce regret about saving too little or not purchasing long-term care insurance among Hispanic American respondents. Conversely, once provided with such information, African American respondents regretted claiming Social Security early by an additional 55% compared with the control group.

Conclusions for Wealth Planners

As Hurwitz and Mitchell point out, some prior studies have suggested that people experience regret when they compare the potential results from having made one choice to those from other choices. Regret is less likely, on the other hand, when people are unable to compare the results of the choice they made versus other outcomes.

“For instance, if someone does not understand or does not think about anticipated longevity, that individual may be less likely to experience regret in later life regarding financial decisions made when young,” the authors posit. “Moreover, regret aversion could lead individuals to avoid information about other possible outcomes, as well as the risks of the chosen option.”

Ultimately, Hurwitz and Mitchell hypothesize that, since many people avoid obtaining objective survival information, providing them with such information will increase their chances of experiencing regret and potentially alter financial choices relevant for old age.

“Our results illuminate a major reason older people end up with financial regret, namely because they had inaccurate perceptions of longevity when they made key saving, benefit claiming and insurance decisions,” the authors conclude. “This has an important policy implication, in that providing people with objective longevity information when they make key financial decisions could help them avoid making mistakes and hence avoid regret in later life.”

(Image: Shutterstock)


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