Do retirement planning strategies alter the effect of time preference on retirement wealth?

ABSTRACT

An individual’s willingness to accumulate retirement wealth is influenced by their preference for intertemporal consumption. People with a strong preference for current consumption (high personal discount rate) may choose to save less and face the risk of decreased retirement preparedness. A negative relation between a high personal discount rate and retirement wealth may be reduced when individuals engage in some form of retirement planning. Using the National Longitudinal Survey of Youth, we provide evidence that respondents with a high personal discount rate accumulated 37% less retirement wealth, on average, between 2004 and 2008, when compared with respondents with a low personal discount rate. However, when retirement planning strategies were included in the model, there was no statistical difference in retirement wealth between people with high and low personal discount rates. The retirement planning strategies included calculating a retirement income need, hiring a financial planner for retirement or engaging in both of these activities.

KEYWORDS:

• Retirement
• time preference
• wealth
• financial planner

JEL CLASSIFICATION:

• D14
• D90
• J26

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A higher PDR means that someone places a greater value on current consumption or that they have to be compensated with a higher rate of return in order to defer consumption to a future time period.

² Refer to Finke and Huston (2013) for more information on the construct of these variables.

³ Either as a linear scale or as a factor.

⁴ We used a Wilcoxon–Mann–Whitney test for this analysis.