Financial Planning Horizon: A Measure of Time Preference or a Situational Factor?

Abstract

Many researchers have examined the influence of the financial planning horizon variable in the Survey of Consumer Finances and the Health and Retirement Study. The question asks respondents to choose the most important time period for saving and spending decisions. These researchers have assumed that the variable reflects the time preference of respondents. However, it is also possible that the variable reflects respondent situations. To examine whether the variable is situational or is a measure of a persistent preference, we used the 1992-2007 U.S. Survey of Consumer Finances datasets and examined the relationship between household characteristics and the financial planning horizon. After controlling for demographic and economic variables, the estimated planning horizon shows a hump shape along with age that peaks at age 43. The results suggest that the financial planning horizon variable is a situational factor rather than measuring a constant time preference.

Keywords: planning horizon, saving horizon, Survey of Consumer Finances, time preference

JEL Classification: D91, D14