The Irrational Retirement Choices We Make

Funny thing about the way we make key decisions on when and how to retire: Often, we're not very rational. And a few new, fascinating studies just presented at the annualRetirement Research Consortium meeting in Washington, D.C., prove it.

By "not very rational," I don't mean that our choices are nutty. We're just not doing what economists say we should be doing. Janet Novack of Forbes recently wrote a smart piece about annuities along these lines, noting that economists typically say retirees should convert their savings into these monthly-income-for-life products — but most people don't.

(MORE: How to Take Your Pension: Lump Sum or Annuity?)

There's actually a good reason why economists characterize retirees and pre-retirees as irrational about such things as when to claim Social Security and stop working full-time: These choices are as much psychological as they are financial.

"Is a good decision one that gives you the best economic outcome or what makes you the happiest or most comfortable? That's hard to say," said Suzanne Shu, an assistant professor at UCLA Anderson Graduate School of Management, and a co-author of one of the new studies. "

Here's how four of the studies say Americans in their 50s, 60s and 70s make retirement choices today – irrationally in the first three cases, but rationally in the last one:

Why So Many Claim Social Security So Early

Economists, financial planners and, yes, Next Avenue writers typically recommend delaying Social Security benefits until age 70, rather than grabbing them as soon as allowed, at 62. That's because, as Kerry Hannon just wrote in "5 Cures for Women's Retirement-Spending Paralysis," the size of your checks will be larger.

Social Security benefits grow by 8%  annually for every year you delay claiming between your "full retirement age" (66 to 67 for people born after 1943) and age 70; your benefits are cut if you start taking Social Security between age 62 and your full retirement age.

(MORE: 4 Costly Social Security Mistakes to Avoid)

James Mahaney, a vice president at Prudential, says you could potentially double your initial Social Security payments by waiting until age 70 to start collecting.

And yet, a paper by Shu and John Payne of Duke University's Fuqua School of Business reports that 50% of Americans start collecting Social Security at 62 or within two months of leaving the labor force; 80% or more claim benefits before their full retirement age.

How come?

To find out, Shu and Payne surveyed 3,000 adults 35 to 65 and found that many people said they intend to claim early due to what you might call the "It's my money!" rationale.

"There's a feeling of 'I contributed to Social Security all these years and I want to be sure I get some of my money out before I die, so if I'm hit by a bus tomorrow, I'll know I got something,'" Shu told me.