One Marshmallow Now or Two When You Retire

One Marshmallow Now or Two When You Retire


I recently had the pleasure of reading The Marshmallow Test: Mastering Self-Control by Walter Mischel, PhD. The book expanded upon the famous marshmallow tests initially administered by Mischel in the 1960s at Stanford University’s Bing Nursery School. The tests were the first of their kind to show how young children, in some cases, were able to delay immediate gratification (one marshmallow) to obtain larger rewards (two marshmallows) in the future. Furthermore, Mischel demonstrated that children who showed self-control at a young age tended to be more successful academically and financially and to have a lower body mass index (BMI).

Although you won’t find this book in the Behavioral Finance section on Amazon or at Barnes & Noble, as a CERTIFIED FINANCIAL PLANNER™ professional, I couldn’t ignore the parallels to retirement planning. We are constantly forced to decide whether to spend our disposable income on short-term pleasures, such as vacations, new cars, clothes, and so on, or to delay gratification by saving money for the future. So many of us will likely reach retirement age only to find that we have to continue working or drastically alter our lifestyle because we failed to save enough.

What can we do to improve our retirement plans and ensure that we are balancing enjoyment now and saving enough for our future selves? Mischel made a number of critical observations that can help us:

  1. Our brains are made up of two systems: the Hot system that triggers impulsive, short-term thinking, and the Cool system that focuses on high-level information processing.
  2. We are less likely to delay gratification when we feel sad or bad; high-stress activates the Hot system.
  3. We tend to discount the value of delayed rewards by 50 percent or more.
  4. We can manage impulsive decision making by “cooling” the present and “heating” the future.
  5. “There’s no good reason for anyone to forgo the 'now' unless there is trust that the 'later' will materialize.”

Practically speaking, Mischel’s research reminds us of the importance of having a financial plan. A plan provides us with the freedom to ignore much of the daily “noise” in the markets and lets our Cool system make informed financial decisions based on empirical data and realistic assumptions. When our Cool system is leading the way, we can clearly evaluate the trade-offs we must make when contemplating whether to consume now or save for later.

When speaking with clients for the first time, I often like to start with goals and work backward. For example, if you are currently 45 years old and want to retire at age 65, we can “plug in” some assumptions about your social security benefits, tax rates, rates of return on your investments, and inflation and then work backward to determine how much you need to be saving on a monthly basis. For clients who are closer to retirement age, this process can also help answer questions about how long you’ll need to work, whether you should pay off your mortgage, and the most effective way to pay for you children’s college education.

As simple as it sounds, this exercise is often enlightening and provides real clarity around the financial choices we face each day.