The applications of behavioral economics don’t end with the initial decision-making process. Another issue and opportunity is tied to the concept of anchoring. Anchoring is when you use existing information to construct a figure or other answer. A popular example in the literature suggests that if you had to estimate the population of Chicago, you would take information you already had, like the size of your city, and apply those figures to gauge the size of Chicago.
On the retirement front, there are two primary anchors that tend to drive retirement decision-making behavior that advisors and clients need to be aware of, and that we have to begin to change: age and assets. While I can only provide empirical evidence, if you were to ask a group of people, “How much money they need to retire?” the most popular (system 1) response would be, “A million dollars.” Additionally, if you were to poll the same group, asking them for the most common age in which people retire, you would hear ages 62-65.
As you might expect, people use this information to establish retirement dates and plans. However, in addition to this, they also use that information to judge and stereotype others. For example, take the person age 67 who is still working. While, he or she may enjoy their wok and have found a balance between it and their home life, age and asset anchors can suggest a different conclusion. Implying that the 67-year-old doesn’t have enough money saved to retire, doesn’t want to spend time with their spouse or family, or both. As a result, the currently accepted retirement age is causing social issues including ageism.
This need to address issues associated with the standard retirement age allows us to look at another aspect of the non-financial part of retirement that doesn’t get enough attention. I call it the “status quo of home life.” What I love about behavioral economics is the assumption that people are flawed, can make impulsive decisions that don’t always support their long-term goals, and that they prefer to make simple decisions rather than complex ones. In other words, people go with whatever is easiest. They don’t want to break the status quo. In other words, they select the default option.
Think about it this way, when you get a new phone or laptop and go in to set it up, do you go through all of the advanced features or accept the default setting and get on with your life? Most people accept the default setting and make adjustments later. The same thing happens to people when they retire. They just do what is easy and what they already know.
This is such a crucial point that gets missed by so many professionals. To put it simply, retirement makes people more of what they already are. It doesn’t change them or make things better. In its most basic form, it gives them more time to do what they want, which is usually what they already know.
This idea of a default or status quo life is one reason why I cringe every time an advisor says, “You have to retire to something.” Nothing could be further from the truth because you’re giving clients permission to follow their current path and then change course once they leave work. Harsh reality is that retirement doesn’t come with extra energy or motivation, so even those with the best intentions to eat better, exercise more often, spend more time with family or travel rarely follow through. Instead they default to what they know. Hence, the reason why so many wives stereotypically say, “All my husband does is sit on the couch and watch TV.”
A final and crucial application of behavioral economics to retirement has to do with loss aversion. Many advisors understand that clients don’t like to lose money, which is a big reason why annuities sales seem to increase year over year. Some clients don’t ever want to feel like they did in March of 2009. So, they opt for a product designed to eliminate the downside risk (bad feelings) even if it means giving up some of the upside. This fear of loss plays a significant role in how people invest and allocate their money.
The same doesn’t hold true for the more personal side of retirement. When a client goes to retire, you never hear their employer or advisor say, “If you stop working, you could end up feeling really bad, alone, irrelevant and even depressed because you have lost your social life here, your purpose, identity and even the physical activity of walking in and out of work every day.” Instead, retirement is framed as this never-ending positive scenario where more freedom and less stress will cross out any potential losses from it.
Since retirement has been portrayed like this for years, by both the media and from their local professionals, people assume it to be true. This in turn causes many people to make a system 1 decision with the non-financial aspects of retirement, thus setting them up to fail from the get-go. It’s a maladaptive, or negative cycle that perpetuates a series of ongoing problems within the retirement decision-making process that we need to change.