Your mind is wired with cognitive biases that influence your decision making—something that does not make planning your retirement as you wish and need easy. Behavioral finance studies the impact cognitive functions, social, and emotional factors have on financial decision making. Understanding this can increase overall financial health and allow for a more secure and successful retirement.
Loss Aversion Understanding
Research shows that folks are more stressed by losing money than gaining it. This is call loss aversion. This can make investment management and retirement planning problematic. In order to achieve a risk-based retirement plan and obtain reducing those Top Ten Risks, having a basic plan is the best first step for a secure retirement. You need to know your options!
Naturally, folks are risk averse—but even this instinct needs to be well-informed. Understanding your motivations and wants for retirement allows you to set goals. When brainstorming your retirement wants and goals, try different ways of phrasing them. Going with the one that feels more motivating is what you should chose.
Know How Your Money Can Buy You Happiness
Think of your retirement as a trade: time and money. You spend decades dedicated to working and retirement is now your time. While planning for retirement keep that in mind! And financially, think about what will bring you happiness. Traveling? Starting a new business after retirement? Downsizing your home and spending more time with family? Knowing how you wish to focus your money promote you to stay motivated and overcome cognitive biases as you focus.
Decisiveness is Key
Ironically, good decision-making skills comes in handy here. Understanding your cognitive biases and having your goals properly aligned means success will allow you to better make those decisions—even understanding your past decisions will help!
The basics for retirement decision making are comprehensive retirement risk understanding, risk-based testing and planning, and knowing strategic options to reduce the risks.
Be Friends with Your Future
Ever heard of present bias? This is our tendency to value the current moments more than the future ones. For example, you are more likely to spend money on something that will make you happy now than you are to invest or save it for your future self. Present bias is actually a major factor in why folks have a hard time saving and planning for retirement.
Visualize your retirement goals. Keeping in mind your future self not only will help with retirement planning, but it will help your overall well-being!
For more information on behavioral finance and how it will help your retirement and your clients’ retirement, listen to our episode “Turning Knowledge into Action” on the Retirement Risk Show.