As humans, we tend to be overoptimistic on everything from our driving ability to investment prowess. It’s perennial problem when it comes to money and retirement management.
A recent study found that people routinely over-estimate their Social Security benefits. Two researchers from the University of Michigan found that “Americans face the challenges of retirement with varying degrees of preparation. Evidence indicates that that many individuals may not be making the best possible choices with respect to their Social Security and retirement savings.”
Why do people expect more than what they actually receive in benefits? Here’s what the researchers found:
- Most retirees find that the amount of Social Security retirement benefits they receive is lower than what they had expected before claiming.
- Not appropriately adjusting for early or delayed claiming could contribute to expectation biases about retirement benefits. In particular, this would be most relevant for those with lower levels of education.
- Current workers recognize that they do not have a good idea of what their future retirement benefits will be. Forty-nine percent of our survey respondents declare having no knowledge about their benefit amount.
- The average expectation bias for monthly retirement benefits in our sample is $307, which equals 27% of the average forecasted benefit for this sample (in current dollars).
- Men display lower expectation bias and are less likely to overestimate their retirement benefits.
How to avoid these misconceptions? You need to estimate benefits based on the age you intend to claim them and your earnings record. A good place to start is Social Security’s benefits estimator tool.
(Photo by Derrick Warren/Mirrorpix/Getty Images)
