Older Adults Place Less Value on Saving

Older adults place less value on saving because advanced age impacts how willing a person is to save for the future. Each year a person ages, his or her discount rate—the implied internal rate of return (IRR) required for postponing having the money today—increases by approximately two percentage points.

The high rate of return is based on a module included in the 2014 Health and Retirement Study (HRS). Among the questions asked of randomly selected participants over the age of 70 was how much they would require 12 months from now to postpone receiving $100 today. The average amount required was $154, implying a discount rate of 54%. To put this number into perspective, a 2015 study intended to be representative of U.S. adults found an average discount rate of 29%. Representative studies of Danish and German adults found average discount rates ranging between 28% and 30%.

The higher the required IRR is, the more a person discounts the value of waiting to receive the sum of money until a future date. Put another way, higher discount rates imply a person places less value on forgoing consumption today to have greater wealth tomorrow. Lower discount rates imply a person sees greater benefit from postponing consumption.

David Huffman et al. found common characteristics among older adults who are more willing to postpone future consumption today for greater wealth in the future. One year of additional education reduces IRR by two percentage points. A cancer or heart condition diagnosis raises IRRs by 11 to 15 percentage points. A mental condition diagnosis (dementia or Alzheimer’s disease) resulted in IRRs that were 35% higher than average. Wealth plays a role, with those whose IRRs were unusually high (more than one standard deviation above average) having 29% less wealth. Those with higher IRRs were also less likely to engage in healthy behaviors.

Not surprisingly, patience is tied to wealth, with those who were found to be more impatient having less wealth. Those who were classified as being impatient were also less likely to have long-term care insurance, assign a power of attorney, have a living will, or have discussed end-of-life medical plans with others.

Source: “Time Discounting and Economic Decision-Making Among the Elderly,” David Huffman, Raimond Maurer and Olivia S. Mitchell, National Bureau of Economic Research.