Deciding when to retire is a major life decision that could have major ramifications if the person making it is wrong.
Shlomo Benartzi and Martin Weber report for MarketWatch that a new study, out of the University of Mannheim in Germany, states that a simple two-question quiz can help predict whether it’s the right time to retire or not.
Here are the questions:
Question 1: You just learned that you are due a tax refund. If you’d like, you can get the $1,000 refund right away. Alternatively, you can get a $1,100 refund in 10 months. Which do you prefer?
Question 2: You just learned that you are due a tax refund. If you’d like, you can get a $1,000 refund in 18 months. Alternatively, you can get a $1,100 refund in 28 months? Which do you prefer?
The point of the exercise is to measure the consistency of a person’s time preferences. Someone with consistent time preferences should answer both questions the same way — choosing the early option both times, or the delayed option both times. Such consistency is a requirement for making financial plans that you stick with.