An Individual’s Chosen Retirement Age: When is the Economically Feasible Retirement Age Chosen over the Anchor Provided by Known Others?

Abstract

Do individuals make rational, well-planned retirement age decisions? Evidence is not conclusive; some decisions seem to be quite reasonable, while others, including the long-term trends generated by these decisions, seem irrational. In order to be able to predict and influence these important decisions, the process leading up to making them needs to be better understood. The process an individual uses to make a retirement decision may be influenced by a rational allocation of money, time, and effort, as suggested by a utility-maximizing Household Production approach. Alternately, the decision process may be strongly influenced by an anchor, defined by the retirement ages chosen by friends, neighbors, relatives, and colleagues, as suggested by Anchoring and Prospect Theory. Studies investigating anchoring and risk-seeking or risk-aversion behavior, which results when a target is seen as a loss or a gain from the anchor, have found that individuals make irrational decisions under many different circumstances. A set of retirement decision propositions, which hypothesize that the heuristic of Anchoring and the resulting cognitive biases described by Prospect Theory will influence the chosen retirement age, are developed in this paper. Retirement information provided by the employer is a possible moderator that may reduce the influence of the anchor on the retirement decision; a set of moderator hypotheses are also developed in this paper. Propositions strongly supported by existing research predict that, unless sufficient information regarding retirement issues is used by an individual, he or she is likely to choose an inappropriate retirement age.