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Psychological Foundations of Financial Planning for Retirement

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Abstract

Little is known about the psychological mechanisms that underlie financial planning for retirement. Most studies of financial planning and investing have used demographic indicators (e.g., age, gender, income) to predict individual differences in saving. In the present study, a model of planning is tested in which psychological indicators (future time perspective, retirement goal clarity, and self-rated financial knowledge) are posited to mediate the relationship between demographic indicators and saving behaviors. Path-analytic techniques were used to test the model, based on data from 265 middle-aged working adults. Analyses revealed substantial support for the role of psychological factors in the retirement planning process. Findings have theoretical implications for the development of psychologically based models of planning, as well as applied implications for those who seek to understand the psychomotivational forces that underlie tendencies to plan and save.

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Notes

  1. The effective poverty rate, used to describe those individuals who are considered either poor or near-poor, is 125% of the official federal poverty threshold.

  2. We had two working assumptions regarding this variable. The first was that if subjective errors in self-rated knowledge exist, they will not be systematically related to other individual difference variables in the model. The second assumption was that any hypothetical errors between self-rated financial knowledge and actual financial knowledge would sum to zero.

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Acknowledgments

This work was supported in part by a grant to the first author from the National Institute on Aging (#1-R03-AG-19849-01). The first author also wishes to express his great thanks to the Rector of the Netherlands Institute for Advanced Studies (NIAS) for providing him with the opportunity, as a fellow-in-residence, to complete the paper.

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Authors and Affiliations

  1. Department of Psychology, Oklahoma State University, Stillwater, OK, 74078, USA

    Douglas A. Hershey

  2. Gerontology Program, University of Kentucky, Lexington, KY, USA

    Joy M. Jacobs-Lawson

  3. Department of Psychology, University of Southern California, Los Angeles, CA, USA

    John J. McArdle

  4. Department of Psychology, University of Virginia, Charlottesville, VA, USA

    Fumiaki Hamagami

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  1. Douglas A. Hershey
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  2. Joy M. Jacobs-Lawson
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  4. Fumiaki Hamagami
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Correspondence to Douglas A. Hershey.

Appendix: Items from the Four Scales Used in the Investigation

Appendix: Items from the Four Scales Used in the Investigation

Future Time Perspective

    1. I follow the advice to save for a rainy day.

    2. I enjoy thinking about how I will live years from now in the future.

    3. The distant future is too uncertain to plan for. (R)

    4. The future seems very vague and uncertain to me. (R)

    5. I pretty much live on a day-to-day basis. (R)

    6. I enjoy living for the moment and not knowing what tomorrow will bring. (R)

Retirement Goal Clarity

    1. Set clear goals for gaining information about retirement.

    2. Thought a great deal about quality of life in retirement.

    3. Set specific goals for how much will need to be saved for retirement.

    4. Have a clear vision of how life will be in retirement.

    5. Discussed retirement plans with a spouse, friend, or significant other.

Self-rated Knowledge of Financial Planning for Retirement

    1. I am very knowledgeable about financial planning for retirement.

    2. I know more than most people about retirement planning.

    3. I am very confident in my ability to do retirement planning.

    4. When I have a need for financial services, I know exactly where to obtain information on what to do.

    5. I am knowledgeable about how Social Security works.

    6. I am knowledgeable about how private investment plans work.

Retirement Planning Activity Level

    1. Frequently read articles/brochures on investing or financial planning.

    2. Read one or more books on investing or financial planning.

    3. Frequently visited financial planning sites on the World Wide Web.

    4. Gathered or organized your financial records.

    5. Regularly tuned into television/radio shows on investing or financial planning.

    6. Conducted a thorough assessment of your net worth.

    7. Identified specific spending plans for the future.

    8. Discussed financial planning goals with a professional(s) in the field.

    9. Discussed financial retirement plans with an employer’s benefits specialist.

    10. Discussed retirement plans with a knowledgeable friend or acquaintance.

  1. Note: (R) indicates item is reverse scored

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Hershey, D.A., Jacobs-Lawson, J.M., McArdle, J.J. et al. Psychological Foundations of Financial Planning for Retirement. J Adult Dev 14, 26–36 (2007). https://doi.org/10.1007/s10804-007-9028-1

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