Psychological Foundations of Financial Planning for Retirement Douglas A. Hershey Æ Joy M. Jacobs-Lawson Æ John J. McArdle Æ Fumiaki Hamagami Published online: 15 January 2008 Ó Springer Science+Business Media, LLC 2008 Abstract Little is known about the psychological mech- anisms that underlie financial planning for retirement. Most studies of financial planning and investing have used demographic indicators (e.g., age, gender, income) to predict individual differences in saving. In the present study, a model of planning is tested in which psychological indicators (future time perspective, retirement goal clarity, and self-rated financial knowledge) are posited to mediate the relationship between demographic indicators and sav- ing behaviors. Path-analytic techniques were used to test the model, based on data from 265 middle-aged working adults. Analyses revealed substantial support for the role of psychological factors in the retirement planning process. Findings have theoretical implications for the development of psychologically based models of planning, as well as applied implications for those who seek to understand the psychomotivational forces that underlie tendencies to plan and save. Keywords Retirement planning Á Savings Á Financial planning Á Psychology Á Adult development Introduction In the past two decades, significant strides have been made to ensure that older Americans are able to maintain their finan- cial independence after leaving the workforce. In fact, the effective poverty rate among individuals over the age of 65 has dropped from 20.5% in 1986, to 15.6% in 2006 (U.S. Census Bureau 2007). 1 Despite the positive economic trend, an alarmingly large segment of retirees still have incomes that fall below the poverty threshold (Federal Interagency Forum on Aging-Related Statistics 2004; Lusardi and Mitchell 2007; Weir and Willis 2000). Many retirees who find themselves in dire financial straights could have set aside savings while still employed, but they did not. For them, the only options are to seek housing or financial support from family and friends, or continue to work well beyond the traditional retirement age in order to make ends meet. Others, in contrast, have amassed a considerable retirement nest egg, only to see its value slowly eroded by inflationary forces, or altogether decimated by health care costs incurred after having left the workforce. There are still others who have established a conscientious pattern of saving during their working years that will be suf- ficient to ensure an adequate stream of retirement income. Why is it that so many Americans fail to make adequate financial preparations for retirement? What are the psycho- logical characteristics that distinguish those who save at an insufficient rate over the course of their working lives from D. A. Hershey (&) Department of Psychology, Oklahoma State University, Stillwater, OK 74078, USA e-mail: douglas.hershey@okstate.edu J. M. Jacobs-Lawson Gerontology Program, University of Kentucky, Lexington, KY, USA J. J. McArdle Department of Psychology, University of Southern California, Los Angeles, CA, USA F. Hamagami Department of Psychology, University of Virginia, Charlottesville, VA, USA 1 The effective poverty rate, used to describe those individuals who are considered either poor or near-poor, is 125% of the official federal poverty threshold. 123 J Adult Dev (2007) 14:26–36 DOI 10.1007/s10804-007-9028-1