Do Expectations Shape Outcomes? The Role of Retirement Wealth Expectations in Predicting Later-Life Financial Wealth

Abstract

This study investigates how individuals' expectations about retirement wealth relate to their actual financial outcomes later in life. Using longitudinal survey data from 1992 to 2020, I construct a relative measure based on the ratio of expected retirement wealth to actual financial wealth at retirement to identify an overestimation. This ratio serves as a behavioral proxy for financial optimism and risk preferences. From the cross-sectional analysis, I observe that individuals’ relative expectations can be explained by gender, educational attainment, expected retirement age, and earnings in the same year. Individuals with higher education (high-school level and graduate-level) and those who are expected to retire later tend to report higher relative expectations, suggesting optimism bias among these groups. The time trend analysis reveals a persistent and widening disparity in average financial wealth between overestimate and non-overestimate individuals. Individuals who overestimate their retirement wealth consistently accumulate significantly more financial wealth across the years. This trend may indicate lower risk aversion among the overestimate group, reflecting underlying risk preferences that influence financial behavior and long-term wealth accumulation. These findings underscore the importance of incorporating psychological and behavioral traits—such as optimism and risk tolerance—into assessments of retirement preparedness. These also emphasize the need for targeted financial education initiatives aimed at correcting biased expectations and improving decision-making in retirement planning.