What’s Secretly Sabotaging Your Finances? — Your Brain
Rather than making deliberate well-reasoned choices, our brains often latch onto the first piece of information offered when making a decision, even though we may not be aware we are doing so — a process cognitive scientists have named “anchoring.” You already know how it works. We’ve all seen a sign like this: “SAVE! 4 cans of soup for $6. Limit 12 cans per customer!” How many cans would you buy?
A study found that setting quantity limits increases sales. Shoppers who bought soup from displays with no quantity limits purchased an average of 3.3 cans of soup. Shoppers with limits of 12 purchased an average of 7 cans. Like Velcro, the quantity limit latched onto shoppers’ brains.
The Velcro effect of anchoring can influence far more consequential decisions, in ways we may not even realize. Consider the process of determining the “right” retirement age:
Does the “anchoring” effect cause people to retire too soon?
The earliest age at which people can retire is age 62. But that’s about the worst age to retire. When people retire prior to “full” retirement age, their benefits are reduced, by as much as 30% depending on age. Full retirement age is the age at which retirees qualify for full, un-reduced benefits. That age varies, depending on when you were born, and people need to take action to confirm their full retirement age. Waiting until age 70 allows retirees to maximize their benefit by taking advantage of a delayed retirement credit of 8% per year.
At what age do you think most people retire? According to the Social Security Administration, the largest group retires at age 62 with reduced benefits! Only 4% wait to start benefits at 70, the age at which they would get the maximum amount. Could the fact that most people file for Social Security benefits so early be simply because they hear so often that they can do so at 62? Does 62 become a distorting anchor on our thinking?
Quite likely. Age 62 is simple to remember because it’s the same for everyone. But figuring out your full retirement age (the age when you get full un-reduced benefits) is hard because it differs for every one. It must be looked up online, or you must call the Social Security Administration to confirm it. Only one-out-of three people even know their full retirement age. But your full retirement age, whether it’s 66, 66 plus 4 months, or 67, and the amount you can expect at that age, still doesn’t get you your maximum benefit! Only half of all retirees even know that waiting until age 70 to claim retirement benefits gets you the maximum amount that you qualify for.
With people living longer, retiring too early means potentially leaving tens of thousands in retirement income behind. Who can afford to do that? If you haven’t started benefits yet, beware of the anchor effect, and remember that age 70 is the age to get your maximum retirement benefit. Individual circumstances vary though. It’s a good idea to get professional help if you can, to take your time to learn about your benefits, and to decide the best age for you to start benefits. This is an important decision. It pays to take your time. To learn more about the “anchor effect,” read “What Was I Thinking?”
Learn more about your best retirement age using Social Security website’s benefit planning tools or call the Social Security Administration toll free at 1-800-772-1213. Many areas of the country hold programs and workshops on retirement and benefits. Find out what is planned in your area by contacting your local senior center, library, community colleges and universities.