Behavioral economists have identified many ways that our own thought processes can lead us down bad financial paths. And now comes word that one such thought process—”framing”—may have led generations of retired workers to make a bad choice in one of the most important financial decisions: when to begin taking Social Security benefits.

If you’re eligible for benefits (you’ve paid in to the system for at least 10 years), you could opt to begin receiving benefits as early as age 62, and that’s what a majority of today’s recipients chose.

However, if you wait until your “Full Retirement Age” (65-67, depending on when you were born), you will receive a much higher monthly amount. And if you wait until age 70, you’ll receive still more.

It’s a vitally important decision, and one that requires taking many factors into consideration—your financial need, life expectancy (the longer you live, the more total benefits you will receive by claiming later), desire to continue working (if you claim earlier than your full retirement age, every two dollars you earn over $15,120 reduces your Social Security benefits by $1), and more.

Now you can add another factor into the mix: the words used in describing the decision at hand.

As reported by US News,

[The researchers] found that framing the decision in terms of gains or losses led to different consumer choices. For example, the decision to take benefits early could be described as “gaining benefit dollars” or “losing future dollars.” Likewise, the decision to defer benefits to a later age could be couched as either a gain via higher benefit payments or a loss of benefits that were not received in earlier years.

The researchers found that another “cognitive bias” also came into play: anchoring. This is what you experience when you visit a restaurant offering prime rib for what seems like an exorbitant price of $45. By comparison, $25 for the top sirloin seems reasonable.

In the Social Security study, participants who were asked to consider the implications of taking benefits at age 62 were compared with those who considered the implications of taking benefits at age 66.

Framing the decision in terms of gaining higher benefit payments by waiting and anchoring it in an age-66 scenario led to later claiming.

The study also found that framing the decision with a break-even analysis leads to earlier claiming. This analysis compares the accumulated benefits over time of claiming at age 62 vs. claiming later. For many people, seeing that they would have to live until their late 70s in order for a Full Retirement Age claim date to pay off makes waiting seem like “a risky gamble.” That, despite the fact that they may have a high likelihood of living even longer, which would make waiting until their Full Retirement Age the more lucrative decision.

The Social Security Administration used to have a break-even analysis calculator on its web site, but removed it after discovering that it was heavily influencing people to claim early.

According to the researchers,

The financially less literate, individuals with credit card debt and those with lower earnings are more influenced by framing than others.

Where else have you seen framing and anchoring influence some of your financial decisions?

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

Successful investing involves making several smart moves, but it’s just as important to avoid making some key mistakes. Along those lines, the Wall Street Journal recently highlighted Five Really Dumb Money Moves You’ve Got to Avoid. Let’s take them from the top.

1. Reaching for yield

What this country needs is a good 5% certificate of deposit. Instead the collapse in interest rates, and the Federal Reserve’s policy of keeping them down for as long as possible, is driving people crazy—especially people who need to generate income from their investments.

In these circumstances, people start to do really foolish things in the desperate hunt for higher interest rates. That includes taking on crazy amounts of risk, or investing in complex products they don’t understand, in the hope of higher yields….

For some reason, people have a hard time understanding that when they put money in anything that offers a better return (than the widely known and understood forms of investing), there’s a risk-related reason for that higher payout. It’s highly likely that investors lose more money due to seeking higher returns in “sure-fire” investments that promise significantly high returns than for any other reason. Please don’t be naive.

2. Going into the poor house to send Junior to a country-club college.

Over the past 40 years, the cost of tuition and fees at a private university has tripled—after accounting for inflation. The cost of a public university has quadrupled. The cost of getting a bachelor’s degree has become a scandal in this country. Students spend $160,000 on a four-year degree and the results are too often questionable.

Financial planners strongly advise parents against plundering their own retirement savings, which they are likely to need, to pay for this.

Completely agree! For many years I have advised parents, “Don’t do it!” There are many ways for students to get out of college with little to no debt, but older parents don’t have as many options if they face higher-than-expected living expenses during retirement. We all love our kids and provide for them the best we can, but community colleges, grants, scholarships, and, dare I say it, working through college, are all options for them that should be on the table.

3. Owning stock in your employer

This is one of the silliest and riskiest moves any investor can make. If the company hits trouble, you get whacked twice. You can lose your job and your savings—all in one fell swoop. Ask anyone who worked for Enron…or Lehman Brothers.

This should be familiar territory for SMI readers. We’re written on this topic many times, most recently in April 2012. We concluded: “a general guideline that is useful is to limit your investing in any one stock (your company or otherwise) to 5%-15% of your total investable assets. Given that you already have so many of your financial eggs in your employer’s basket (i.e., your income and your health benefits), the lower end of that range is probably more appropriate when dealing with your company’s stock. Also, the smaller the value of your total portfolio, the more you should gravitate to the lower end of the range.”

4. Taking Social Security too early

If you can afford to delay taking your Social Security retirement benefit, do. Someone earning $50,000 a year who starts claiming Social Security as soon as he or she is able, age 62, will typically collect a monthly check of about $1,000, according to the Social Security Administration. If they wait until they are 70, that amount would double.

This is another familiar topic; we have long advised that for most people it’s best to wait at least until your Full Retirement Age before drawing benefits.

5. Buying long-term bonds

A surprising number of people still subscribe to the flawed and circular argument that bonds, including long-term government bonds, are “safe.” In reality, bonds—especially long-term government bonds—are the rare example of a bubble that has been explicitly declared. The Fed is openly printing money and using it to buy up such bonds, driving up the price and driving down the interest rates, in order to help the economy. There is no dispute about this. It’s public policy.

A 30-year Treasury bond currently sports an interest rate of just 3.1%. That’s barely half a percentage point above long-term inflation forecasts. Based on history, the yield should be at least 4.5%, or two percentage points above inflation. Thirty-year Treasury inflation-protected securities, known as TIPS, sport a “real” or inflation-adjusted yield of 0.6% a year. Again, it should be 2%.

We haven’t recommended long-term bonds for years due to the risk. And TIPS, which gave us a nice return last year, were dropped from this year’s allocation recommendations due to the risk.

So, I’m hopeful that no SMI readers will be found guilty of these five “really dumb” money moves. We’re here to help you avoid those.

Austin Pryor

By Austin Pryor

Austin Pryor has three decades of experience advising investors, and is the founder of the Sound Mind Investing newsletter and website. Austin lives in Louisville, Kentucky, with Susie, his wife of 46 years. Two of his sons, Andrew and Matthew, work with him at Sound Mind Investing. A third son, Tre, is a RealtorŪ in the area.

This week’s picks for the best in personal finance from around the web.

8 habits of highly effective retirees (MarketWatch). What else would you add to this list?

Expense and emotions in preparing for long-term care (NY Times). How knowing someone personally who needed long-term care impacts our own decisions.

Average US retirement age is 61—and rising (CNBC). It can be a very good thing to plan to work longer. However, as we’ve written before, there are also some serious threats to that plan.

Tap an IRA early, delay Social Security (Kiplinger). Ideas for maximizing income and minimizing taxes in retirement.

Refi reverse mortgage, keep wife in house (Bankrate.com). Why it’s so important to choose wisely when deciding who is on the loan. For more on reverse mortgages, see Is a Reverse Mortgage Right for You?

And from the blogosphere…

Is a QE exit really scary? (Seeking Alpha). Thoughts on why investors need not worry about a change in Fed policy.

Four items you really need to include in your estate planning checklist (PT Money). If you’d like to take a deeper dive on this topic, consider going through the Compass small-group study, Set Your House in Order.  I’m going through it right now and it’s excellent.

Calculating the ROI of a 4-year college degree (My Money Blog). The cost of college has generated plenty of debate about the value of a college education. Here are some stats to consider, with some interesting findings related to competitive vs. not-so-competitive schools.

Personal finance “experiences” for older kids (The Simple Dollar). Leave it to Trent to throw a few unusual ideas into the mix.

Does Jesus command us to help the poor? (ChristianPF). At first, the answer seems obvious. It’s in the details that things can get complicated.

We’d love to hear your thoughts about any of the above. To weigh in, just meet us in the comments section.

Find out why over 10,000 people look to Sound Mind Investing for trustworthy, proven investment guidance. At just $9.95 per month, a web membership is a low-cost/high-reward investment in your financial future.

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

In the late 1960s, Stanford University researchers conducted an experiment among hundreds of four-year-olds.  One at a time, the children were brought into a room and told they could eat one treat such as a marshmallow right away. Or, if they could wait until a researcher returned from a brief errand, they could have two.

A few kids couldn’t wait at all.  Before the researcher had even finished giving the instructions, the treat was gone.  The majority of kids held out for an average of three minutes.  About 30 percent were able to resist temptation, waiting the 15 minutes the researcher was gone in order to get the better reward.

Some 12 years later, when the kids were in high school, lead researcher Walter Mischel tracked them down again.  He asked their parents, teachers, and academic advisors about the kids’ ability to plan and think ahead, cope with problems, and get along with peers.  He also requested their S.A.T. scores.

What he found was amazing.  The kids who were not able to wait had more behavioral problems at school and at home. They struggled in stressful situations, often had trouble paying attention, and found it difficult to maintain friendships.

As for their S.A.T. scores, the kids who could wait 15 minutes scored an average 210 points higher than the kids who could wait only 30 seconds.  Clearly, good things really do come to those who wait.

The Essential Life Skill

So helpful is the ability to delay gratification that psychologists call it the master principle.  They say it is the single most essential psychological skill for effective living.

Of course, it’s pretty important for wise money management as well.  Those who routinely save for what they want instead of impatiently buying today on credit save thousands of dollars in interest.  Those who patiently invest over long periods of time stand a much better chance of being able to help their kids pay for college and having enough money for their own retirement.

The successful marshmallow experiment kids were the ones who clearly saw that the future reward would be much better than the immediate reward.  The desire for that better reward motivated them to wait.

Taking a Truly Long-Term Perspective

The Apostle Paul said something very similar about heaven.  He said everyone who has placed their faith in Christ has “the firstfruits of the Spirit,” meaning that the presence of the Holy Spirit gives us a glimpse of heaven.  And he said this taste of our future inheritance naturally leads to two responses: A yearning for heaven and the patience to wait for that reward (Romans 8:22-25).

Do you yearn for heaven?  When I first thought about that, I had to admit that I don’t.  When I’m away from home, I yearn to see my family.  Right now I’m yearning for our summer vacation.  As for heaven?  I’m thankful that it’s real, but I can’t say I’m in any hurry to get there.

If it seems that you don’t yearn for heaven either, maybe you actually do. Think about something you love to do—your favorite hobby, perhaps, or a place where you love to vacation.  C.S. Lewis said our longing to spend more time doing what we most enjoy is an expression of our ultimate longing for heaven.

“…it (is) not in them,” he wrote, “it only comes through them and what (comes) through them (is) longing…For they are not the thing itself; they are only the scent of a flower we have not found, the echo of a tune we have not heard, news from a country we have never visited.”

That’s why even the best things of this world only leave us wanting more.  As Lewis wrote, “If I find in myself a desire which no experience of this world can satisfy, the most probable explanation is that I was made for another world.”

A Recipe for Greater Joy, Even Now

The realization that the things of this world will never completely satisfy our deepest longings is not bad news; it’s good news.  It has the power to help us stop looking to them for what they are incapable of delivering, and to free us to enjoy them for what they are: good gifts from God, but not the basis of our identity, security, or ultimate happiness.

The patience to wait for our ultimate reward in heaven is what turns the master principle into the Master’s principle.

As John Eldredge wrote, we express our longing for God best when we “enjoy what there is now to enjoy, while waiting with eager anticipation for the feast to come.”

How might your use of money change if you were clearer about what the things of this world can deliver and what only heaven can deliver?

Investors with the discipline and patience to follow the investment strategies of Sound Mind Investing have been handsomely rewarded. Put the strategies to work in your portfolio with a web membership. At just $9.95 per month, it’s a low-cost/high-reward investment in your financial future.

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

The Wall Street Journal recently described how some of those who formerly thought bonds were headed for a tumble have reversed themselves. They now see bonds as safe investments for the time being:

A run of uneven economic data this spring has wrong-footed scores of investors—including some of the bond world’s boldface names—who entered the year betting that an accelerating U.S. expansion would send Treasury prices tumbling, ending a three-decade-long fixed-income bull market.

Among those who have rolled back bearish calls are Bill Gross, founder and co-chief investment officer of Pacific Investment Management Co., and manager of the world’s biggest bond fund, and Rick Rieder of BlackRock Inc., who oversees fixed income for the giant investment firm with $3.96 trillion in assets…

Messrs. Gross and Rieder are among dozens of investors and pundits who have warned after the financial crisis of the risks of holding U.S. government debt with interest rates near record lows. The feared declines in the Treasury market haven’t come to pass, however, amid tepid economic growth and the Federal Reserve’s easy-money policies [quantitative easing] that bolster bond prices.

Bond-market bears have predicted since 2009, when the Fed began its Treasury-bond purchases, that the efforts would lead to an increase in inflation, a development many said would pressure the Fed to roll back its easing programs, hurt bond prices and send yields higher. Those predictions came to naught in 2010, 2011 and 2012…. This year has played out much the same way.

Mr. Gross changed his view on 10-year [intermediate-term] Treasurys in early April, turning bullish as prices rose, though he remains bearish on 30-year [long-term] debt.

The bond market, which has been in a massive bull market for 30+ years, continues to be bolstered by the Fed. However, not everyone believes quantitative easing is a good thing. Here’s a humorous youtube clip from one critic.

So we have at least two experienced bond gurus telling us that bonds are safe for now. Hopefully they’re right. However, there’s one prominent investor who pretty strongly disagrees:

If you didn’t collect enough of Warren Buffett’s wisdom from Berkshire Hathaway’s annual meeting, the news channel CNBC followed up Monday with a Buffett lovefest, interviewing the Oracle of Omaha for several hours…

Bonds, he said, are “a terrible investment right now,” and stocks “aren’t ridiculously high.” This after the Dow Jones Industrial Average and the S&P 500 hit records Friday and with some big investors having at least temporarily backed off bearish bond calls. (Remember Bill Gross in April?)

While there are some conditions under which he’d buy bonds, those don’t exist today, Buffett said. With the Federal Reserve buying $85 billion a month in bonds, government debt is priced “artificially” right now, in his view. “When that changes, people could lose a lot of money.”

While the Dow closed out on an all-time high last week — no “down” milestone there — Buffett, a big fan of stocks, predicted that up is the only way to go from here. “Probably in my lifetime … you will see markets that are far higher than this,” he told CNBC. “The retention of earnings by American industry, the growth of the country, will cause stocks to go higher over time.”

I hope Buffett is correct about stocks. We would all profit handsomely from that. As for bonds, those following SMI’s portfolio guidelines don’t have any of their portfolio allocated to long-term bonds. Those are the bonds that will be hardest hit when interest rates finally do begin to rise.

To learn more about the latest Sound Mind Investing portfolio recommendations, sign up for a web membership. At just $9.95 per month, it’s a low-cost/high-reward investment in your financial success. Find out for yourself why over 10,000 people count on SMI for trustworthy, proven investment advice.

Austin Pryor

By Austin Pryor

Austin Pryor has three decades of experience advising investors, and is the founder of the Sound Mind Investing newsletter and website. Austin lives in Louisville, Kentucky, with Susie, his wife of 46 years. Two of his sons, Andrew and Matthew, work with him at Sound Mind Investing. A third son, Tre, is a RealtorŪ in the area.