Financial planning continues to become more holistic in its approach by looking at all aspects of a client’s life—not just their finances. And as this trend continues, financial psychology plays an increasingly important role in engaging and motivating clients to reach their goals.
The Psychology Of Retirement
Arguably one of the most important goals for many clients is saving enough money for a comfortable retirement. While financial security is a major consideration of any retirement conversation, so too is understanding the impact of this significant life transition. The relationship clients have with money is comprised of years of emotional history that can create barriers to achieving this goal. Advisors who can help overcome these barriers will provide their clients with peace of mind, confidence, and the help they seek to make meaningful changes.
An ageing population and increased life expectancy is a global phenomenon, catching the attention of many financial professionals and policymakers. In the United States, the 65-and-older population has now reached 16.9% and is estimated to hit 21.6% by 2040. This unprecedented growth means many clients are spending more years in retirement, and more years means more planning.
While many clients have some expectations about when and how they will retire, they often seek a financial advisor to help with wealth preservation, to balance medical costs as they age, and assist in navigating market uncertainties, among a myriad of other services. Yet, despite expertly devised retirement plans, some advisors may see signs of clients struggling mentally and emotionally as they prepare for, and even during, retirement.
Retirement And Our Relationship With Our Job
The relationship we hold with our jobs is often more than just how we make a living; it’s many times how we see ourselves—and how others see us. Beyond identity, our jobs often provide structure and purpose to our lives and create a social outlet for forming unique relationships with our colleagues. For most, retirement will markedly shift their daily activities and social roles. While sufficient financial resources and planning are critical, it is only part of the equation, as clients may find themselves grieving the loss of that identity.
As a result, retirement-related transitions may amplify the risk factors of late-life depression. And while depression may be common in older and retiring adults, it is not a normative part of the process (Source: Linh Dang, Aparna Ananthasubramaniam & Briana Mezuk (2022) Spotlight on the Challenges of Depression following Retirement and Opportunities for Interventions, Clinical Interventions in Aging, 1037-1056, DOI: 10.2147/CIA.S336301). In fact, there is significant support that retirement may even be beneficial for mental health, improving depression for retirees due to decreased work-related stress, increased autonomy, and increased engagement in physical activity and social leisure (Source: van der Heide I, van Rijn RM, Robroek SJ, Burdorf A, Proper KI. Is retirement good for your health? A systematic review of longitudinal studies. BMC Public Health. 2013;13(1):1180. doi:10.1186/1471-2458-13-1180).
Research suggests reactions to major events, such as retirement, can significantly depend on the nature of the transition (e.g., planned, voluntary, involuntary) and the access people have to resources that help adapt to the emotional and practical changes (e.g., social network, financial resources), as well as aspects of personality (Source: Linh Dang, Aparna Ananthasubramaniam & Briana Mezuk (2022) Spotlight on the Challenges of Depression following Retirement and Opportunities for Interventions, Clinical Interventions in Aging, 1037-1056, DOI: 10.2147/CIA.S336301).
Advisors Can Serve As A Resource
For decades, researchers and financial professionals have acknowledged the impact of psychological and emotional influences, most notably as behavioral finance gained widespread popularity in the 1970s as Daniel Kahneman and Amos Tversky studied the psychological influences on investors and the financial markets. They posited humans and markets are not always rational and applied subconscious biases and heuristics to the way people make financial decisions.
The demand from advisors to learn about, identify, and respond to these emotive behaviors and mindsets continues to grow as evidenced by the results of the CFP Board’s 2021 Practice Analysis study. In response, the Board released their book The Psychology of Financial Planning in April of 2022.
The topic of financial psychology goes beyond that of behavioral finance by speaking to the deep range of emotions and influences that may be experienced by the client, including how their relationship with money was formed over a lifetime, and seeks to understand how that relationship impacts their life and finances today.