Skip to main content

Psychological Foundations of Financial Planning for Retirement

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.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3

Notes

  1. 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. 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.

References

  1. Austin, J. T., & Vancouver, J. B. (1996). Goal constructs in psychology: Structure, process, & content. Psychological Bulletin, 120, 338–357.

    Article  Google Scholar 

  2. Baltes, P. B., & Baltes, M. M (1990). Successful aging: Perspectives from the behavioral sciences. New York: Cambridge University Press.

    Google Scholar 

  3. Bassett, W. F., Fleming, M. J., & Rodrigues, A. (1998). How workers use 401(k) plans: The participation, contribution, and withdrawal decisions. National Tax Journal, 51, 263–289.

    Google Scholar 

  4. Beach, L. R. (1995). Image theory: Personal and organizational decisions. In G. A. Klein, J. Orsanau, R. Calderwood, & C. E. Zsamobk (Eds.), Decision making in action: Models and methods (pp. 148–157). Norwood, NJ: Ablex Publishing.

    Google Scholar 

  5. Bernheim, B. D. (1998). Financial illiteracy, education, and retirement saving. In O. S. Mitchell & S. J. Schieber (Eds.), Living with defined contribution pensions: Remaking responsibility for retirement (pp. 38–68). Philadelphia: University of Pennsylvania Press.

    Google Scholar 

  6. Cantor, N., & Kihlstrom, J. F. (1987). Personality and social intelligence. Englewood Cliffs, NJ: Prentice-Hall.

    Google Scholar 

  7. Cantor, N., & Zirkel, S. (1990). Personality, cognition, and purposeful behavior. In L. A. Pervin (Ed.), Handbook of personality: Theory and research (pp. 135–164). New York: Guilford Press.

    Google Scholar 

  8. Cutler, N. E., Gregg, D. W., & Lawton, M. P. (1992). Aging, money, and life satisfaction. New York: Springer.

    Google Scholar 

  9. DeNavas-Walt, C., & Cleveland, R. (2002). U.S. Census Bureau, current population reports, P60–218, Money income in the United States: 2001. Washington, D.C.: U.S. Government Printing Office.

    Google Scholar 

  10. DeNavas-Walt, C., Proctor, B. D., & Lee, C. H. (2005). Income, poverty, and health insurance coverage in the United States: 2004. Current Population Reports, P60–229. Washington, DC: U.S. Government Printing Office.

  11. Denton, M. A., Kemp, C. L., French, S., Gafni, A., Joshi, A., Rosenthal, C. J., & Davies, S. (2004). Reflexive planning for later life. Canadian Journal on Aging Supplement, 23, S71–S82.

    Google Scholar 

  12. Ekerdt, D. J. (2004). Born to retire: The foreshortened life course. The Gerontologist, 44, 3–9.

    PubMed  Google Scholar 

  13. Ekerdt, D. J., Hackney, J. K., Kosloski, K., & DeViney, S. (2001). Eddies in the stream: The prevalence of uncertain plans for retirement. Journal of Gerontology, 56B, S162–S170.

    Google Scholar 

  14. Federal Interagency Forum on Aging-Related Statistics. (2004). Older Americans 2004: Key indicators of well-being. Federal Interagency Forum on Aging-Related Statistics. Washington, DC: U.S. Government Printing Office.

  15. Federal Reserve Bank. (2002). What’s behind the low U.S. personal savings rate? FRBSF Economic Letter, No. 2002–09, March, 2002.

  16. Ferraro, K. F., & Su, Y. (1999). Financial strain, social relations, and psychological distress among older people: A cross-cultural analysis. Journals of Gerontology, 54B, S3–S15.

    Google Scholar 

  17. Fingerman, K. L., & Perlmutter, M. (2001). Future time perspective and life events across adulthood. Journal of General Psychology, 122, 95–111.

    Article  Google Scholar 

  18. Friedman, S. L., & Scholnick, E. K. (1997). An evolving “blueprint” for planning: Psychological requirements, task characteristics, and social-cultural influences. In S. L. Friedman & E. K. Scholnick (Eds.), The developmental psychology of planning: Why, how, and when do we plan? (pp. 3–22). Mahwah, NJ: Erlbaum.

    Google Scholar 

  19. Furnham, A., & Argyle, M. (1998). The psychology of money. New York: Routledge.

    Google Scholar 

  20. Greninger, S. A., Hampton, V. L., Kitt, K. A., & Jacquet, S. (2000). Retirement planning guidelines: A Delphi study of financial planners and educators. Financial Services Review, 9, 231–245.

    Article  Google Scholar 

  21. Goldsmith, E., & Goldsmith, R. E. (1997). Gender differences in perceived and real knowledge of financial investments. Psychological Reports, 80, 236–238.

    Article  Google Scholar 

  22. Goldsmith, R. E., Goldsmith, E. B., & Heaney, J. (1997). Sex differences in financial knowledge: A replication and extension. Psychological Reports, 81, 1169–1170.

    Google Scholar 

  23. Grable, J. E., & Lytton, R. H. (1997). Determinants of retirement savings plan participation: A discriminant analysis. Personal Finances and Worker Productivity, 1, 184–189.

    Google Scholar 

  24. Gustafsson, S. S., & Meulders, D. E. (2000). Gender and the labour market: Econometric evidence of obstacles to achieving gender equality. New York: St. Martin’s Press.

    Google Scholar 

  25. Gustman, A. L., & Steinmeier, T. L. (2005). Imperfect knowledge of social security and pensions. Industrial Relations, 44, 373–397.

    Google Scholar 

  26. Helman, R., Salisbury, D., Paladino, V., & Copeland, C. (April, 2005). Encouraging workers to save: The 2005 Retirement Confidence Survey. EBRI News Brief No. 280, Employee Benefit Research Institute.

  27. Hershey, D. A. (2004). Psychological influences on the retirement investor. CSA: Certified Senior Advisor, 22, 31–39.

    Google Scholar 

  28. Hershey, D. A., Jacobs-Lawson, J. M., & Neukam, K. A. (2002). Influence of age and gender on workers’ goals for retirement. International Journal of Aging and Human Development, 55, 163–179.

    PubMed  Article  Google Scholar 

  29. Hershey, D. A., & Mowen, J .C. (2000). Psychological determinants of financial preparedness for retirement. The Gerontologist, 40, 687–697.

    PubMed  Google Scholar 

  30. Hershey, D. A., Mowen, J. C., & Jacobs-Lawson, J. M. (2003). An experimental comparison of brief retirement planning intervention seminars. Educational Gerontology, 29, 339–359.

    Article  Google Scholar 

  31. Hu, L., & Bentler, P. M. (1999). Cutoff criteria for fit indices in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling, 6, 1–55.

    Article  Google Scholar 

  32. Jacobs-Lawson, J. M., & Hershey, D. A. (2005). Influence of future time perspective, financial knowledge, and financial risk tolerance on retirement savings behaviors. Financial Services Review, 14, 331–344.

    Google Scholar 

  33. Jacobs-Lawson, J. M., Hershey, D. A., & Neukam, K. A. (2004). Gender differences in factors that influence time spent planning for retirement. Journal of Women and Aging, 16, 55–69.

    PubMed  Article  Google Scholar 

  34. Joo, S., & Grable, J. E. (2000). A retirement investment and savings decision model: Influencing factors and outcomes. Consumer Interests Annual, 46. Retrieved on January 28, 2006 from http://www.consumerinterests.org/files/public/retirement.PDF.

  35. Kragie, E. R., Gerstein, M., & Lichtman, M. (1989). Do Americans plan for retirement? Some recent trends. Career Development Quarterly, 37, 232–239.

    Google Scholar 

  36. Lewin K. (1943). Defining the “Field at a Given Time.” Psychological Review, 50, 292–310. Republished in Resolving Social Conflicts & Field Theory in Social Science, Washington, D.C.: American Psychological Association, 1997.

  37. Lusardi, A. (1999). Information, expectations, and savings. In H. Aaron (Ed.), Dimensions of retirement economics (pp. 116–124). New York: Brookings Institution/Sage Foundation.

    Google Scholar 

  38. Lusardi, A. (2000). Saving for retirement: The importance of planning. TIAA-CREF Institute Research Dialogue, 66, 1–11.

    Google Scholar 

  39. Lusardi, A., & Mitchell, O. S. (2007). Baby boomer retirement security: The roles of planning, financial literacy, and housing wealth. Journal of Monetary Economics, 54, 205–224.

    Article  Google Scholar 

  40. Milgram, N., & Tenne, R. (2000). Personality correlates of decisional and task avoidant procrastination. European Journal of Personality, 14, 141–156.

    Article  Google Scholar 

  41. Mowen, J. C. (2000). The 3M model of motivation and personality: Theory and empirical applications to consumer behavior. Boston: Kluwer Academic Publishers.

    Google Scholar 

  42. Mowen, J. C., Hershey, D. A., & Jacobs-Lawson, J. M. (2000, November). Psychological determinants of financial preparedness for retirement. Poster presented at the annual meeting of the Gerontological Society of America, Washington, D.C. Abstract published in The Gerontologist, 40, Special Issue 1.

  43. Neukam, K. A. (2002). Fear- and goal-based planning motives: A psychological model of planning for retirement. Unpublished Master’s Thesis. Stillwater, OK: Oklahoma State University.

  44. Padawer, E. A., Jacobs-Lawson, J. M., Hershey, D. A., & Thomas, D. G. (2007). Demographic indicators as predictors of future time perspective. Current Psychology, 26, 102–108.

    Article  Google Scholar 

  45. Patterson, M. P. (2000). The new working woman’s guide to retirement planning: Savings and investing for a secure future. Philadelphia: University of Pennsylvania Press.

    Google Scholar 

  46. Poterba, J. M. (1996). Personal saving behavior and retirement income modeling: A research assessment. In E. A. Hanushek & N. L. Maritato (Eds.), Assessing knowledge of retirement behavior (pp. 123–148). Washington D.C.: National Academy Press.

    Google Scholar 

  47. Rowe, J. W., & Kahn, R. L. (1998). Successful aging. New York: Pantheon Books.

    Google Scholar 

  48. Seguino, S., & Floro, M. S. (2003). Does gender have any effect on aggregate saving? An empirical analysis. International Review of Applied Economics, 17, 147–166.

    Article  Google Scholar 

  49. Seijts, G. H. (1998). The importance of future time perspective in theories of work motivation. Journal of Psychology, 132, 154–168.

    Article  Google Scholar 

  50. Shmotkin, D. (1991). The role of time orientation in life satisfaction across the life span. Journal of Gerontology: Psychological Sciences, 46, P243–250.

    Google Scholar 

  51. Stawski, R. S., Hershey, D. A., & Jacobs-Lawson, J. M. (2007). Goal clarity and financial planning activities as determinants of retirement savings contributions. International Journal of Aging and Human Development, 64, 13–32.

    PubMed  Article  Google Scholar 

  52. Sunden, A. E., & Surette, B. J. (1998). Gender differences in the allocation of assets in retirement savings plans. American Economic Review, 88, 207–211.

    Google Scholar 

  53. U. S. Census Bureau. (2005). Statistical abstract of the United States: 2006. (Table 681: Money income of families—Distribution by family characteristics and income level: 2003). Retrieved January 23, 2006, from http://www.census.gov/prod/2005pubs/06statab/income.pdf.

  54. U. S. Census Bureau. (2007). Historical poverty tables—Current population survey. (Table 12: Persons 65 and over with incomes below 125 percent of the poverty threshold. Retrieved November 12, 2007, http://www.census.gov/hhes/www/poverty/histpov/hstpov12.html.

  55. Weir, D. R., & Willis, R. J. (2000). Prospects for widow poverty. In O. S. Mitchell, P. B. Hammond, & A. M. Rapport (Eds.), Forecasting retirement needs and wealth (pp. 208–234). Philadelphia: University of Pennsylvania Press.

    Google Scholar 

  56. Wykle, M. L., Whitehouse, P. J., & Morris, D. L. (2005). Successful aging through the life span: Intergenerational issues in health. New York, NY: Springer.

    Google Scholar 

  57. Yabkoboski, P., & Dickemper, J. (1997). Increased saving but little planning: Results of the 1997 Retirement Confidence Survey. EBRI Issue Brief, 191, 1–21.

    Google Scholar 

Download references

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.

Author information

Affiliations

Authors

Corresponding author

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

Rights and permissions

Reprints and Permissions

About this article

Cite this article

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

Download citation

Keywords

  • Retirement planning
  • Savings
  • Financial planning
  • Psychology
  • Adult development