Americans Prioritize Short-Term Finances Over Distant Needs

A study from the Center for Retirement Research at Boston College finds even the wealthiest segment of savers has trouble with long-term financial planning—implying automation and simplicity are the best approaches to promoting retirement readiness.

The research, “Are Americans of All Ages and Income Levels Shortsighted about their Finances?” was penned by researchers Steven A. Sass and Jorge D. Ramos-Mercado, and is based on extensive data from the FINRA Investor Education Foundation’s 2012 State-by-State Financial Capability Survey, which compiles the financial experiences and outlooks of some 25,500 American adults from households at all income and age levels.

To test whether Americans are shortsighted about their finances, researchers measured the strength of the relationships between households’ financial satisfaction and their day-to-day or distant financial problems. 

The analysis concludes that Americans at all ages and income levels are shortsighted about their finances, substantially favoring short-term measures of financial fitness over longer-term measures. The researchers even suggest, based on the results, that Americans “on their own cannot be expected to devote much effort to addressing distant financial problems.”

Given the significantly expanded reliance on household saving via the defined contribution (DC) plan paradigm, the findings suggest a need to “make it easy and automatic for households of all ages and income levels to save enough to secure a basic level of financial well-being in retirement,” the researchers say.

For the underlying FINRA survey, researchers asked Americans to rate the impact of certain day-to-day problems and long-term problems on their current feelings of financial wellness. Examples of near-term challenges included “difficulty covering expenses,” “heavy current debt burden,” “unemployment,” and “inability to access $2,000.” Long term problems included “no medical insurance,” “no life insurance,” “no retirement plan access,” “no college savings,” and “mortgage underwater.”

In all three age groups examined by the Center for Retirement Research at Boston College, all four day-to-day problems are associated with large, statistically significant reductions in current financial satisfaction. The reductions are generally 1-point or more on the scale from 1 to 10, with only one less than 0.5. Reductions associated with distant problems, by contrast, are never greater than 1 and are greater than 0.5 in only three cases, the research shows.

The results were similar across age groups but not totally uniform by age. For example, among day-to-day problems, the inability to access $2,000 is associated with much larger reductions in satisfaction at younger ages, and heavy debt burdens are related to a greater reduction at older ages.

Among distant problems, the research finds only “not saving for college” and “not having medical insurance” are associated with statistically significant reductions in current satisfaction among all three age groups. Among young workers, such reductions are also associated with concern about repaying student loans; among middle-age workers, with not having life insurance and having a mortgage greater than the value of one’s house; and among workers approaching retirement, with concern about repaying student loans and having a mortgage greater than the value of one’s house.

Boston College researchers note one surprising result is that having no retirement plan—whether a defined benefit pension or 401(k) or individual savings plan—has no statistically significant effect on the financial assessments of workers in any age group, even those approaching retirement.

“While the relationship between worker assessments and specific financial problems varies significantly by age, the incidence of problems is much more similar across age groups,” the research concludes. “This similarity is especially true for day-to-day problems, which are associated with the largest reductions in financial satisfaction.”

The lack of attention to distant needs “does not mean that people will resist efforts to nudge them in the right direction,” the research concludes. “As evidenced by the success of auto-enrollment in dramatically raising 401(k) participation rates, especially among young and low-income workers, a lack of salience, rather than hyperbolic discounting, would seem to underlie the muted relationships between [current] financial assessments and distant deficiencies.”

The full analysis is available for download here.