Retirees, Financial Planning Horizon, and Retirement Satisfaction

The determinants of retirement satisfaction have been well-documented. Researchers have found associations between retirement satisfaction and gender differences (Seccombe & Lee, 1986; Smith & Moen, 2004), marital status (Price & Joo, 2005; Szinovacz & Davey, 2005), whether retirees have migrated during their retirement (Pearson & Kalekoski, 2021), health (O’brien, 1981 ; Van Solinge & Henkens, 2008), participation in leisure and recreational activities (Pinquart & Schindler, 2009; Ragheb & Griffith, 1982), and social bonds (Oh, 2003). Pearson and Lacombe (2021) show that retirees who unlock home equity to finance consumption can improve retirement satisfaction. Wang and Matz-Costa (2019) found that social resources and social status affect retiree health and retirement satisfaction, ultimately concluding the need for social programs to improve retirement satisfaction. Pearson and Guillemette (2020) highlight that, absent of human capital, there is a lack of a theoretical justification for investment risk reduction when entering retirement, ultimately suggesting that retirement satisfaction may be hindered by decreasing investment risk during retirement. Elder and Rudolph (1999) find that, even when controlling for income, wealth, marital status, and health, retirement planning prior to retirement has a significant positive impact on retirement satisfaction.

Throughout the literature, a recurring determinant of a satisfactory retirement is the presence of a plan for retirement or a plan for asset consumption in retirement (Elder & Rudolph, 1999; Lee & Law, 2004; Principi et al., 2020). Intensifying the need to develop a plan for retirement is the global trend of employers shifting from defined benefit plans to defined contribution plans, placing both workers and retirees with unprecedented responsibility for their retirement. The daunting array of financial decisions that workers and retirees now face are further exacerbated by the alarming findings on financial literacy. Van Rooij et al. (2012) provides evidence linking financial literacy and its positive association with retirement planning. However, globally many individuals lack knowledge about basic financial concepts (Huston, 2010; Lusardi & Mitchell, 2007). In particular are the findings from Lusardi and Mitchell (2011), which reveal that financial literacy is lower among women, the less educated, and Hispanics and African-Americans. With low levels of financial literacy coupled with increased financial responsibility during retirement, research providing insight into financial planning during retirement is warranted.

Although the current literature has shown that there is a need for financial planning prior to retirement, very little is known about the need for financial planning during retirement. Furthermore, to the authors’ knowledge, the literature has yet to explore retirees’ financial planning horizon and its association with retirement satisfaction. In what follows, this paper analyzes the need of maintaining a long-term financial planning time horizon during retirement and discusses how financial planning can aid in promoting a satisfactory retirement.

Several studies have examined financial planning horizon, most of which use a variable constructed from either the Survey of Consumer Finances (SCF) or the Health and Retirement Study (HRS).¹² Utilizing these data sets, researchers have found that individuals with short-term financial planning horizons are more likely to have an outstanding credit card balance (Kim & DeVoney, 2001), are more likely to rent their homes (James, 2009), and are less likely to perceive having adequate income for retirement (Malroutu & Xiao, 1995). Researchers have also found that individuals with long-term financial planning horizons are more likely to have a greater portion of wealth invested in equity assets (He & Hu, 2007), participate in employer sponsored retirement plans (Munnell et al., 2001), and are more likely to save (Rha et al., 2006) and have an emergency fund (Bhargava & Lown, 2006).

An argument can be made that the aforementioned findings suggest that financial planning horizon is a proxy for an individual’s marginal rate of substitution between current and future consumption, or an individual’s ‘time preference.” Although many studies have utilized financial planning horizon as a proxy for an individual’s ‘time preference,” Hong and Hanna (2004) suggest that financial planning horizon is a situational factor. For example, individuals who are saving for a down-payment to purchase an automobile may have a short-term financial planning horizon. On the other hand, individuals who are saving for the college education of their newborn child may have a long-term financial planning time horizon.

As noted by Fisher amd Montalto (2010), individuals make saving and consumption decisions by varying time horizons, rather than basing their consumption decisions on lifetime income. Generally, individuals with long-term horizons are more likely to plan their consumption (Rutherford & DeVaney, 2009). Planned consumption may provide inherit utility-generating value in the form of increased economic stability and financial security. If planned consumption provides utility-generating value, then individuals who engage in financial planning may be more likely to have higher levels of retirement satisfaction.

This is the first study, to the authors’ knowledge, to examine the financial planning horizons of retirees. Given the heterogeneity surrounding retirees’ finances, retirees may continually need financial planning advisory services throughout retirement to promote a satisfactory retirement experience. This study hypothesizes that retirees who have a long-term financial planning horizon will be more satisfied with their retirement than retirees with short-term financial planning horizons. Furthermore, this study hypothesizes that retirees who have a short-term financial planning horizon will be less satisfied with their retirement.

Data collected from the Health and Retirement Study (HRS) are examined. Specifically, the 1992-2018 RAND HRS longitudinal file is used. Data and other information provided by the HRS are collected through survey questions and recorded responses. The purpose of the data collection effort is to provide data for research on health and aging of older Americans. Consequently, the HRS collects dota from individuals over the age of 50. The data are unbalanced.

This study analyzes retiree satisfaction. Therefore, the sample is limited to those who answered “retired” when asked, “Are you working now, temporarily laid off, unemployed and looking for work, disabled and unable to work, retired, a homemaker, or what?” Observations with responses other than “retired” and missing values are dropped. As an additional measure, retirees who report earned income are dropped from this sample, as they are not considered fully retired. The number of observation is 34,878 from 17,642 groups.

Due to the ordered nature of the dependent variable, a random-effects ordered probit model is utilized to test this study’s hypothesis. The random-effects part of our estimation strategy is designed to capture unobserved heterogeneity across the individuals. The following random-effects ordered probit model is estimated via maximum likelihood on the unbalanced panel: SATit∗=β0i+β1finplnit+CVit+αi+eitSATit=0 if SATit∗<μ1 (Not at all satisfied)SATit=0 if μ1≤SATit∗<μ2 (Moderately satisfied)SATit=l if μ2≤SATit∗ (Very satisfied)

where SATit* is a latent measure of retiree i’s satisfaction in wave t. The unknown thresholds, μ₁ and μ₂, ore to be estimated.

The variable finpln_it is a categorical variable representing retirees’ financial planning horizon. The category next few months is the reference category, to which next year, next few years, next 5-10 years, and longer than 10 years are compared. The matrix CV_it contains the control variables that are utilized in this model. The control variables included are age, age², net worth, income, education, married, white, male, and health. Age, age², net worth, and income enter the matrix as continuous variables. Education enters the model as a continuous variable, measured as the retirees’ years of completed education. Married, white, and male enter the matrix as dichotomous variables, where each of the variables are coded as a “1” if the retiree is married, white, or male, respectively. A “0” is coded for married, white, or male, otherwise. Health enters the matrix as a categorical variable. The poor health category is the reference category that fair, good, very good, and excellent health categories are compared.

a_i is the unknown intercept for each retiree i. β₁, is the coefficient associated finpln_it, β_j. is a vector of coefficients associated with the control variable matrix, CV_it, β₀ represents the y-intercept of the model. The intercept value for individual i can be expressed as β_0i = β₀+e_i, where i = 1,…,N and E(e_i) = 0 and Var(=σe2). Below is the assumption concerning the composite error component: ei∼N(0,σe2)E(eiet)=0 for i≠t

Average marginal effects provide the magnitudes for each of the effects on retirement satisfaction. Robust (sandwich) estimators are applied to correct for heteroskedasticity.

Table 1 provides a frequency distribution of the retirement satisfaction variable and the financial planning horizon variable. Of the entire (N = 34,878) retiree sample, 3,695 (10.59%) report being very satisfied with retirement, 13,238 (37.96%) report being moderately satisfied with retirement, and 17,945 (51.45%) report being not at all satisfied with retirement. Of the entire (N = 34,878) retiree sample, 6,222 (17.84%) have a financial planning horizon of a few months, 5,037 (14.42%) have a financial planning horizon of next year, 9,484 (27.19%) have a financial planning horizon of the next few years, 9,703 (27.82%) have a financial planning horizon of 5-10 years, and 4,432 (12.71%) have a financial planning horizon of 10+ years.

Among the 3,695 retirees who report being very satisfied with their retirement, 1,198 (32.42%) have a financial planning horizon of a few months, 499 (13.51 %) have a financial planning horizon of next year, 776 (21.00%) have a financial planning horizon of the next few years, 700 (18.95%) have a financial planning horizon of 5-10 years, and 522 (14.13%) have a financial planning horizon of 10+ years. Among the retirees who report being moderately satisfied with their retirement, 2,688 (20.31%) have a financial planning horizon of a few months, 2,106 (15.91%) have a financial planning horizon of next year, 3,683 (27.82%) have a financial planning horizon of the next few years, 3,335 (25.19%) have a financial planning horizon of 5-10 years, and 1,426 (10.77%) have a financial planning horizon of 10+ years. Among the 17,945 retirees who report being not at all satisfied with their retirement, 2,336 (13.02%) have a financial planning horizon of a few months, 2,432 (13.55%) have a financial planning horizon of next year, 5,025 (28.00%) have a financial planning horizon of the next few years, 5,668 (31.59%) have a financial planning horizon of 5-10 years, and 2,484 (13.84%) have a financial planning horizon of 10+ years.

Table 2 reports the descriptive statistics of the sample. The average age, net worth, income, and years of education are 70.94, $150,712, $49,647, and 12.51, respectively. Retirees who report earned income were dropped from the sample, thus, income represents non-labor income, such as income from social security, annuities, and pensions. 57.18% of the retirees are married, 78.34% of the retirees are white, and 43.51 % of the retirees are male. 10.99% report their health as poor, 24.18% report their health as fair, 31.60% report their health as good, 25.65% report their health as very good, 7.59% report their health as excellent.

Table 3 provides the results of a correlation analysis conducted to understand the correlates of retirement satisfaction. The correlation analysis reveals that retirement satisfaction is correlated with financial planning horizon (p = 0.1408). The strongest correlate of retirement satisfaction is health (p = 0.4005).

Table 4 provides the average marginal effects from the ordered probit regression. The results for the not at all satisfied response suggest that when compared to the next few months financial planning horizon, next year, next few years, next 5-10 years, and next 10+ years are all associated negatively (p < 0.001) with average marginal effects of 0.0159, 0.023l, 0.0305, 0.0288, respectively. The results for the moderately satisfied category suggest that when compared to the next few months financial planning horizon, next year, next few years, next 5-10 years, and next 10+ years are all associated negatively (p < 0.001) with average marginal effects of 0.0173, 0.0265, 0.0367, 0.0342, respectively. The results for the very satisfied category suggest that when compared to the next few months financial planning horizon, next year, next few years, next 5-10 years, and next 10+ years are all associated positively (p < 0.001) with average marginal effects of 0.0332, 0.0496, 0.0673, 0.0631, respectively.

The results for age suggest that a 1 -year increase in age has an average marginal effect of -0.0127 (p < 0.001), -0.0159 (p < 0.001), and 0.0286 (p < 0.001) on being not at all satisfied, moderately satisfied, and very satisfied with retirement, respectively. Age² resulted in average marginal effects of 0.0001 (p < 0.001), 0.0001 (p < 0.001), and -0.0002 (p < 0.001) on being not all satisfied, moderately satisfied, and very satisfied with retirement, respectively. The results for Age and Age² suggest a non-linear relationship between age and retirement satisfaction.

A 1-year increase in educational attainment resulted in average marginal effects of-0.0048 (p < 0.001), -0.0060 (p < 0.001), and 0.0108 (p < 0.001) on being not all satisfied, moderately satisfied, and very satisfied with retirement, respectively. Being married resulted in average marginal effects -0.0392 (p < 0.001), -0.0494 (p < 0.00l), and O.0885 (p < 0.00l) on being not all satisfied, moderately satisfied, and very satisfied with retirement, respectively. Being white resulted in average marginal effects of -0.0255 (p < 0.001), -0.0321 (p < 0.001), and 0.0575 (p < 0.00l) on being not all satisfied, moderately satisfied, and very satisfied with retirement, respectively.

With respect to health, poor health serves as the reference category, to which fair, good, very good, and excellent health ore compared. The average marginal effects for fair, good, very good, and excellent health on not at all satisfied are-0.0882 (p < 0.001), -0.1456 (p < 0.001), -0.1821 (p < 0.001), and -0. 1967 (p < 0.001), respectively. The average marginal effects for fair, good, very good, and excellent health on moderately satisfied are -0.0342 (p < 0.001), -0.1012 (p < 0.00l), -0.1855 (p < 0.001), and -0.2397 (p < 0.001), respectively. The average marginal effects for fair, good, very good, and excellent health on very satisfied are 0.1225 (p < 0.00l), 0.2467 (p < 0.00l), 0.3675 (p < 0.00l), and 0.4364 (p < 0.00l), respectively.

This study examined retiree financial planning horizon and its association with retirement satisfaction. The descriptive analysis highlights that of the 34,878 retirees in this study, only 4,432 (12.71 %) have a financial planning horizon of 10+ years. Of additional note is the finding that only 6,222 of the retirees (17.84%) have a financial planning horizon of a few months. This suggest that an alarming number of retirees may not engage in long-term financial planning.

The average marginal effects estimated from the random-effects ordered probit regression suggest that as financial planning horizon increases from a few months to 10+ years, the overage change in probability of being very satisfied with retirement increases by 0.0631. Moreover, as financial planning horizon increases from a few months to 10+ years, the average change in probability of being not satisfied at all with retirement decreases by 0.0288.

The key findings suggest that to increase the probability of having a satisfactory retirement, and decrease the probability of having an unsatisfactory retirement, retirees should engage in long-term financial planning. Long-term financial planning provides an outline for financial stability, and without financial planning engagement many retirees may compromise their chances for a satisfactory retirement experience. Developing and maintaining a long-term comprehensive financial plan can ensure retirees are positioned to meet their current and future financial needs.

When considering the results in a broad context, an implication garnered from the findings is that there is a need for financial planning during retirement to promote a satisfactory retirement experience. A long-term financial plan may be a critical determination of retirement satisfaction, especially when considering that as retirees age they may experience a decrease in their ability to engage in employment for purposes of labor income. Thus, financial planning considerations, such as account distribution planning and retirement income strategies, are paramount financial planning considerations for retirees, particularly during the latter-half of their retirement. Retirees who continually engage in financial planning throughout their retirement position themselves to achieve a satisfactory retirement experience.

As noted by Hong and Hanna (2004), individuals who have a short-term financial planning horizon, when many important goals are long-term, might be an indication of a high discount factor. However, ascertaining the goals and needs of individuals may be difficult and variation in the levels of goal importance and relativity are likely present. Thus, time discounting alone cannot fully explain an individual’s financial planning horizon. As this relates to retirees, retirees may vary in areas that relate to their financial planning horizon. For example, there is likely to be variation in retirees’ net worth and in both the types and amounts of their non-labor income, such as social security income, pension income, and annuity income. Because of the demographic and preference variation among retirees, there is additional situational relevancy when retirees consider their financial planning horizons. For example, a retiree that is relocating to another state may have a shorter financial planning horizon when compared to a retiree engaging in estate planning.

One limitation to note is that the Health and Retirement Study (HRS) assesses an individual’s financial planning horizon as a direct function of saving and spending planning. An issue is thus created when considering the broader financial planning landscape. For example, retirees may have provided a different response if they were asked about their financial planning horizon in other domains of financial planning, such as investment management or tax planning.

The results indicate that retirees with short-term financial planning horizons are vulnerable to experiencing a less than satisfactory retirement. Additionally, the results indicate that retirees with longer financial planning horizons are more likely to experience a very satisfactory retirement. These results suggest the need for individuals to place emphasis on having a long-term financial planning horizon during retirement. Financial planners and financial counselors should continually engage in financial planning with their retired clients to facilitate the attainment of their long-term goals.

Retirees face a different set of financial planning considerations that they may not have encountered prior to their retirement. As a result, retirees may be unaware of forthcoming financial planning considerations that may be challenging for retirees to navigate without a financial planner or financial counselor. For example, many retirees are likely to experience required minimum distributions, Roth IRA conversion opportunities, and need retirement income planning during their retirement. Consequently, financial planners and financial counselors should emphasize planning for their retired clients’ long-term financial needs.