A little over 50 years ago, an experiment was run at Stanford University regarding delayed gratification, known as the Stanford Marshmallow Experiment. The idea behind the experiment was to see if children would be willing to wait about 15 minutes and not eat a marshmallow in order to obtain an even larger reward, a second marshmallow or a pretzel stick based on their preference. That study found that kids that could wait performed better in follow-up studies on other metrics, but recent studies have called the results of correlating success in adulthood with behaviors in childhood into question.
Whether or not the behavior of delayed gratification is related to success elsewhere in life, some direct results regarding the strategy can be seen in terms of dollars and cents. July is somewhat of a special month to those that believe in deferred gratification too, because it starts out with Bobby Bonilla Day.
Bobby Bonilla was a famous baseball player for the NY Mets, and though he is retired now, he is still receiving almost $1.2 million dollars every year through 2035 from his former employer. This may seem like a generous retirement package, but in fact it is a deferred compensation package all the way back from the year 2000. More details can be found in this EPSN article, but the most unbelievable point is that the Mets bought out his $5.9 million contract with a deferred compensation package that incorporated an 8% interest rate. This meant they would start paying him 10 years later, nearly $1.2 million every year for 25 years, almost $30 million.
The speculation on the fantastic terms on this deal turn on the Mets needing more cashflow to hire other players that year, and that the owner could outperform the amount needed to pay Bonilla with the fantastic returns he was getting from Bernie Madoff (we know how that ended up).
This wasn’t the only time that Bobby Bonilla chose deferred compensation though. He also has a deferred compensation package from the Orioles that began in 2004 for $500,000 a year until 2029.
More conventional ways to defer gratification into retirement?
Early on – If you have 35 years to save, the way Bobby did (until his final payout in 2035 when he turns 72), investing into an IRA is a way for a person to hold off on spending now to receive more in the future. Although it should be realized that inflation will erode purchasing power in that time as well, $7,000 invested today with a 7% average annual return 35 years later would turn into $74,736! Deferring that $7,000 (or more in a 401(K)) each year early in the workforce with a lot of time for compound returns can really make that delayed gratification a pretty big resource in retirement.
Close to retirement – Another delayed gratification possibility for average people when it comes to retirement is when to start taking social security benefits. If you start benefits early, then you lose 8% of what you would receive each year at normal retirement age. If you delay benefits until you are 70, you receive an additional 8% per year past full retirement age for the rest of your life. Actuarily, when you take the projected age of everyone into account it all balances out. This means that you’ll really only receive more by delaying if you also beat the average life expectancy and are long-lived. Looking at health and family history is important here, but this is also one of the few times you can increase a payout that is automatically indexed for inflation.
Considering a work-optional lifestyle?
More and more people are considering semi-retirement, or a work-optional lifestyle where they only work some of the time, but aren’t quite sure if they are financially well off enough to begin the gratification of retirement or need to keep delaying.
That’s where Garden State Trust Company comes in. Though many associate trust companies with estate planning, we also handle investment management accounts and can do a holistic overview of your financial situation to help plan retirement spending and see if you are ready. We can handle portfolio management as well, so you can take the time you’d like focusing on retirement or work as you choose, having your financial management running in the background.
Delaying gratification is an important strategy to incorporate into our lives, but a point should also come where we can enjoy gratification without worrying about the potential for a second marshmallow.
