What a Marshmallow Experiment Can Teach You About Retirement

Last Updated Jul 27, 2011 10:23 AM EDT

What insights about retirement planning can we gain from a classic child psychology experiment involving marshmallows? Plenty! Let me explain.

Decades ago, in what's now come to be known as the "Marshmallow Experiment," Stanford researcher Walter Mischel gave a group of three to five year-olds a choice: Eat one marshmallow now, or wait fifteen minutes and get two marshmallows. The experiment was intended to measure children's ability to delay gratification.

What did Mischel discover? About 30 percent of the children were able to wait fifteen minutes to get the second marshmallow; the rest gobbled it down before the time was up.

Stanford researchers followed up with these children over the years and found that as they got older, the children who could delay gratification were more likely to do well in school, have higher SAT scores, and obtain jobs; generally, they were more likely to succeed at life. Low-delayers, however, were more likely to have higher body-mass index measurements later in life, have problems with drug use and generally be less successful overall.

This YouTube video of toddlers grappling with this weighty dilemma can teach us a thing or two about delaying gratification. You'll see that the successful kids were able to distract themselves from the tempting marshmallow by singing to themselves, or covering their eyes, or playing hide-and-go-seek under the desk; they found some trick to delay eating the marshmallow. In short, they were sufficiently motivated to do whatever it took to get that second marshmallow.

So what does all this have to do with retirement planning? Quite a bit, actually. The fact is, almost half of all Americans start their Social Security benefits at age 62, which provides the lowest possible income. But if they could instead wait until age 70 to start receiving benefits, they could almost double their monthly income and increase their expected lifetime payout.

I understand that this may be easier said than done: When I've written about this topic in the past, I received numerous comments from many readers who challenged my reasoning to wait to start Social Security. Here's a summary of a few of those comments, along with my responses:

  • "Take it now. After all, you never know when you'll die or what can happen in the future. Yes, it's true that you can never know what will happen, but if you have at least average health, it's more likely you'll boost your lifetime payout by waiting.
  • "You didn't take into account the time value of money -- you just compared total lifetime payouts in your analyses." If you consider the time value of money, you'll reach roughly the same conclusions.
  • "I started taking Social Security early because I was in poor health." Or "...because I had a job that depressed me greatly." Or "...because I got laid off and couldn't find work and had no other recourse." If you have poor health or truly have no other recourse, these are valid reasons to start Social Security benefits early. Delaying benefits isn't for everybody.
Of course there are circumstances where drawing Social Security early might be the best choice. But I find it very hard to believe that half of all Americans fall into this category.

I think what's really happening with Social Security is that we're conducting a wide-scale version of the marshmallow experiment among older Americans, with roughly the same results as the experiments involving the children: People are learning that they don't have to wait and can instead take the money now.

The same phenomenon exists when employees are offered the option to take their payout in a defined benefit plan as a lump sum, rather than the lifetime monthly payout. Most people elect the lump sum so they can take the money now and not wait for those monthly payments to roll in.

This phenomenon is also evident with people who retire with 401(k) accounts. Most aren't withdrawing from these accounts with the goal of making the money last for a lifetime. Instead, they pull from their 401(k) accounts what they think they need now, without much regard for making their accounts last a lifetime.

I'll wager that the results of this wide-scale marshmallow experiment with retiring Americans will be the same as for the children: Most likely, the people who can delay gratification will have a more successful retirement.

Next: What can we learn from the kids who were successful at waiting?

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.