Thursday, March 20, 2014

Overconfidence and Underestimation: Retirement Survey

Overconfidence and Underestimation: Retirement Survey

 Every year, the Employee Benefit Research Institute publishes the results of the Retirement Confidence Survey.[1]  With the financial markets rebounding, the survey found that employees have regained some confidence in their ability to have enough money for retirement.  As you’d expect, higher wage employees expressed a higher degree of confidence.  Among the dozens of charts in the report, the one set out below struck me as particularly important.  It shows that two out of three respondents believe that they’ll need to accumulate less than one million in order to comfortably retire.   The data doesn’t allow us to see the economic and demographic circumstances of the respondents, so it’s hard to assess what their financial requirements will be in retirement.  Nonetheless, it’s clear from this survey answer that folks are dramatically underestimating the cost of retirement.

A few days ago I criticized an opinion piece in The Wall Street Journal that attacked the extravagance of million dollar public pensions benefits (see, “Millionaire Madness: Misconstruing Pension Benefits, March 18, 2014).  After reading the EBRI report and looking at the chart, I can better understand why many people wind up resenting public pension beneficiaries.  When researchers like Andrew E. Biggs of the American Enterprise Institute point out that public pension plans are going to payout more than a million dollars over the lifetime to some civil servants, it must come as something of a shock to the average employee who thinks that $250,000 or $500,000 will be enough to get through retirement.


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