Who Has a Realistic View of Retirement Readiness?

A study examines the factors that make individuals optimistic about their preparedness for retirement despite having inadequate resources.

Forty-two percent of U.S. households are adequately prepared for retirement, while 46% perceive they will have an adequate retirement, recent research finds.

Among all households that are adequately prepared or not, about 52% have a realistic perception of their retirement readiness.

A study, “Do U.S. Households Perceive Their Retirement Preparedness Realistically?” analyzed the deviation between households’ actual preparedness for retirement and their assessment of retirement readiness, focusing on what factors make some unrealistically optimistic despite being inadequately prepared. Researchers KyoungTae Kim, from the University of Alabama Department of Consumer Sciences, and Sherman D. Hanna, from Ohio State University, found households with a defined benefit (DB) pension plan are more likely to be unrealistic than similar households without one.

The researchers note this is contrary to their expectations, because households with DB plans are able to assess their guaranteed retirement income. A possible explanation is that these households might lack a good understanding of the retirement income generated by their DB accounts, and may just assume that simply having these plans will achieve adequacy.

Similarly, households with a defined contribution (DC) plan are less likely to be realistic than those without one. The researchers say it is plausible that many workers with DC plans are unfamiliar with features of their plans, may be unable to accurately assess retirement adequacy, or may assume that just having a plan may lead to retirement adequacy. They add that these results suggest the need for better employer education for workers with such plans.

According to the research report, it is also possible that workers with these plans have greater financial experience and are more likely to expect mean reversion in returns—that the rebound from a financial downturn will be greater than the downturn—than less-experienced workers without such plans.


Among financial experience variables, the study found the age of the household head is positively associated with the likelihood of being unrealistically optimistic. It is possible that cognitive decline may play a role in this pattern, but the researchers say it seems unlikely that this could be the only factor. They point to cognitive dissonance as the reason for the effect of age on over-optimism. The theory of cognitive dissonance posits that individuals are distressed by conflicting beliefs, so they attempt to decrease their dissonance by either changing their past values, feelings or opinions, or attempting to justify or rationalize their choices. With financial experience, people should be better able to evaluate objective situations, but cognitive dissonance may lead to accepting a lower standard of living in retirement, the researchers say.

Another explanation might be that older investors have more experience in stock market cycles and have more belief in the possibility of a stock market recovery by retirement, but that younger investors, with more limited experience, might be pessimistic.

A puzzling finding of the study was that households that use a financial planner are significantly more likely to be unrealistic than those that do not. The researchers say this raises questions about the accuracy or benefit of the financial planning services these households receive.

The researchers also found households headed by a person with a college degree have a lower rate of being unrealistic optimists than those headed by a person with less than a high school degree. In addition, whites are less likely to be unrealistic than households categorized as black or Hispanic and Asian/others. The researchers say other studies have shown whites have more financial experience with stock ownership than minority households, so it seems plausible that the racial/ethnic differences in being realistic about retirement adequacy might stem from differences in investor experience.

The researchers say the findings in the study are partially consistent with their two hypotheses, indicating that households with greater cognitive ability and more financial experience are likelier to assess their retirement preparedness accurately. However, some findings appear puzzling, and they note this may be because one cannot directly measure the degree of cognitive ability and financial experience from the Survey of Consumer Finances (SCF) data set used for the study. They suggest that to obtain more robust results for retirement perception research, a different data set should be used with direct measures of cognitive ability and/or financial literacy related to the retirement context, such as the Health and Retirement Study (HRS).

The research paper may be downloaded from the Social Science Research Network website.