Does Overspending Harm Retirement Preparation?

Abstract

This study addressed the research question of how overspending is related to retirement preparation. A commonsense answer to this question is this: overspending should negatively impact retirement preparation. However, the existing body of knowledge does not provide evidence to support or deny this assumption. The Behavioral Life Cycle Hypothesis was tested as a theoretical framework to answer this research question, providing valuable insight. Three data sets were used, including the Survey of Household Economic Decisionmaking (SHED), the Survey of Consumer Sciences (SCF), and the National Financial Capability Study (NFCS), to conduct logit and OLS regressions in testing the hypotheses. Because the overspending measurements were only negatively related to retirement preparation in a little over half the analyses, the results point to a new cultural norm where one’s overspending behavior does not necessarily reflect one’s retirement preparation behavior. Results provide support for policy actions related to tightening credit card policies, exposing a lack of awareness on overspending, providing practical approaches for avoiding overspending behavior, and the value of using multiple data sets as a robustness check.