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The Cost of Procrastination with Respect to Retirement Planning

Drs. Jonathan K. Kramer and John S. Walker, Department of Business Administration

Piggy BankIn their most recent collaboration, Dr. Jonathan Kramer and Dr. John Walker quantify the cost of procrastination with respect to retirement planning.  Americans are currently facing a retirement crisis.  According to the National Institute on Retirement Security (NIRS), there are 38 million working-age households (nearly 45% of the total) that do not have any retirement account, either in, or out of the workplace.  The NIRS also reports that for near-retirement households (age 55-64) the median savings is $12,000.  If a person is nearing retirement with little saved, their options for playing catch up are very limited.  They must either start saving much more than they have been (make a drastic lifestyle change), take more risk (which could backfire), postpone retirement, or some combination of these.  It's not an enviable position to be in late in your working career. 

When a person is young, thanks to the power of compounding, their options are much greater.  In other words, the best time to think about retirement planning is when you are young.  Which also means that the cost of procrastinating (delaying retirement saving) is highest when people are in their 20s and 30s relative to their 40s and 50s.  Yet young people generally pay scant attention to saving for retirement.  By quantifying the cost of procrastination it is hoped that students will be able to see more clearly the significant benefits (cost) of (not) starting to save for retirement when they are young. 

Money GrowingIn the same paper, Drs. Kramer and Walker present an example of how even modest amounts of money, invested over long periods of time, in a disciplined manner can grow significantly.  Examples like this are quite common, but there is often a good deal of uncertainty about what rate of return to use as an input, and this can have a significant impact on the resulting projections.  Therefore, the professors use market data from 1871-2012 to determine the optimal look-back period to use when presenting such an example.  This gives instructors a market-based rationale for their rate of return assumption and, thus, makes the analysis more realistic. 

The overarching goal of this work is to help instructors motivate young people to begin an investing regime while in college or shortly thereafter and thus avoid some of the tough choices that many near-retirement households are facing today.  The resulting paper is forthcoming in the Journal of Economics and Finance Education.

 June, 2014