Note: This article is part of Morningstar's September 2015 The road to retirement special report.
Retirement is portrayed in the popular media as an absolute dream: no more 9 to 5, no more deadlines, all the golf and gardening your heart desires. But when you come closer to turning your retirement dream into reality, you may encounter new anxieties -- and not just the financial kind.
"Thinking about aging is what's known as a 'mortality salience cue,' meaning that it reminds people of death," says Morningstar behavioural economist Sarah Newcomb. "We need to be careful not to go too far and dwell on death or we will trigger a fear response that can lead to overspending and increased anxiety."
Newcomb points to three particular findings from the field of behavioural psychology about how mortality salience affects decision-making as people approach retirement.
1. Thinking about death can increase consumption
In a pair of studies from 2000, 60 college students were first assigned one of two essay questions: the first on their feelings about death, the second on their feelings about listening to music. In the first study, they were then asked to write in detail about their expected financial status 15 years into the future. In the second study, the students participated in a simulation in which they owned a forestry company and had to bid against three competitors for timber-harvesting rights, with the caveat that bids promising bigger harvests might be enough to wipe out the forest entirely.
The result: In the first study, the subjects who wrote about death expected to be worth more and spend more money on pleasure than the subjects who wrote about music. In the second study, students who wrote the death-focused essay harvested 12 to 13 more acres of forest, on average, than students who wrote the music-focused essay.
The authors of the two studies concluded that "people's tendencies toward materialism and consumption stem from a source unlikely to disappear: the fear of death."
"When our ego (or our very existence) feels threatened, we can replenish our confidence by enlarging our sense of self," adds Newcomb. "Often the easiest way to do this is by buying things. In this study, it seems like the way people coped with the fear of oblivion was to imagine living large during the time they have."
2. However, saving money reduces anxiety over death
A 2013 series of studies conducted at Poland's University of Social Sciences and Humanities shows "evidence that saving protects from existential anxiety, and probably more so than spending."
In one of these studies, 139 adults were split into two groups and asked to imagine and write down five possible outcomes from a randomly assigned situation. The first group was asked about spending a large amount of money on luxuries, while the second group was asked about saving an equal sum for the future. Following this, all participants completed two more surveys: one on the fear of death and the other on the fear of a painful trip to the dentist. Participants "primed" with the idea of saving or spending reported lower fear of death than the control group, and those primed to save were less afraid of death than those primed to spend.
In another study in the series, 92 adults were asked to complete either the fear-of-death survey or the fear-of-dental-pain survey. They were then asked to imagine that they received a financial windfall and had to decide between using it for long-term savings such as a retirement plan, short-term savings, everyday spending or luxury spending. The group that had completed the fear-of-death survey was likelier to use their hypothetical windfall for saving than those who had completed the fear-of-dental-pain survey.
"On an individual level, saving money is associated with financial well-being, which has the potential to significantly affect one's overall well-being," conclude the researchers. "Our results suggest that, additionally, saving money also plays an important psychological role as a buffer against death anxiety, and is probably a sturdier buffer than consumption."
"When we are faced with our inevitable demise, we look for ways to comfort ourselves," remarks Newcomb. "That can take the form of ease and comfort in a 'you only live once' approach like we see in the first two studies, or we can focus on the security and comfort of having money in savings. Since both coping strategies help to assuage our fears, it's a good idea to focus on the one that puts you in the best financial position."
3. Younger people need to feel connected to their future selves to prepare for retirement early.
A 2013 study surveyed 193 staff members at Stanford University who were eligible for the school's contributory retirement savings plan and were currently saving 10% or less of their salaries for retirement. The subjects selected one of seven Venn diagrams that best illustrated their feeling of overlap between their "current self" and their "future self." They then received one of two messages urging them to save more: One reminded them of their "long-term well-being" while the other reminded them of their "future self." Participants who received the second message increased their savings by higher percentages than those who received the first message. That difference disappeared for participants who indicated a low feeling of closeness with their future selves.
"By understanding and taking account of the complicated relationship people have with their future selves," the researchers say, "it is possible to produce effective interventions to modify behaviour in ways that improve people's lives and help meet pressing policy challenges."
"When people feel closer to the person they imagine being in the future, they care more about caring for their future needs," says Newcomb. "Yet, we need to remain cognizant of the fact that thinking about our future self can also trigger our fear of death. If this happens, and we feel the urge to splurge, remember that saving that cash will bring us closer to feeling at ease."
