This article is important for advisors because it’s designed to help bridge the gap between the soft side and hard side of retirement planning. Too often advisors feel that the personal/emotional side of retirement isn’t important or it’s too fluffy, and that it will take care of itself as long as the dollars and cents are correct. That’s just not the case as key aspects of behavior economics will illustrate.

If you haven’t read my previous article, The Behavioral Economics Of Retirement, I would encourage you do to so. It provides a base foundation for applying science to the retirement planning process and is a good primer for how valuable understanding this soft side can be.

In a nutshell, behavioral economics is about understanding human decision making and behavior. The issue I have with it is the sole focus it puts on financial factors. Granted, the research is useful and I believe has transformed retirement savings for the better. However, the current literature and studies fall far short in the non-financial categories, therefore creating a major void in helping people make better retirement decisions.

Therefore, I want to address several key issues related to it, with the first being loss-aversion. It’s a popular concept that advisors are already familiar with and simply suggests people are more concerned with loss than gain. It’s a big reason why fear-based marketing works so well in our industry, i.e., the fear of running out of money. The interesting thing about retirement planning is we don’t talk about personal/mental/emotional losses during this transition. We don’t tell people to be afraid of losing out on some things.

Instead, we foster what I call gain assumption. In traditional planning conversations, marketing and media, we point to all the things people will gain once they retire. They will gain freedom, time, the opportunity to rekindle relationships, improve their health, restart old or new hobbies, and more.

It’s a beautiful concept. Leave behind all the things you don’t like at work and walk into this idyllic life. But that’s just not how it works. It’s much more complicated than that primarily because of the honeymoon phase of retirement. Essentially, retirement can actually start out great and initially feel like the best thing ever. People relish in their newfound freedom, options and choices.

But what happens after three or six months of self-indulgence? This is where we start to see issues related to temporal discounting. This is another concept many advisors are familiar with. It suggests that people prefer short-term benefits over long-term ones. For example, if you ask someone if they would rather have $100 today or $125 in a month. Most people would take the $100 today because they don’t feel that the longer time horizon is worth the trade-off for $25 more dollars.

The problem with temporal discounting in everyday life in retirement comes when people discount the long-term value of the things they lose at work including routine, social connection and physical activity to name a few. Meaning they delay doing anything proactive to replace them. They assume they deserve this break and can easily pick-up where they left off at some point in the future.

Unfortunately, this happens because we have trained people to do so. We have focused so much on getting people to the finish line of retirement that we haven’t even looked at the damage we have done once we push them into it.

As a result, this honeymoon delay can create emotional burdens and complexity—two factors that serve as the foundation for procrastination. We see this in both traditional retirement planning as well as non-financial retirement planning. In the traditional world, we all know that planning can be complex. There are a lot of factors to consider and sometimes it can be downright overwhelming. So, people put off doing it.

Of course, this doesn’t solve the problem it exacerbates it. People put it off and then as they get closer to retirement, it causes emotional burdens in terms of stress, anxiety and regret. So, once again instead of dealing with it, they put it off and hope that it will fix itself. Hence the retirement savings crisis we have today.

On the other side of the coin, people and relationships can get complex in retirement. Behavioral economics tells us that we don’t always make decisions that are in our best interests despite a desire to do so. Therefore, when people retire and take the first few months to settle in, they realize shortly after that life in retirement isn’t exactly what they thought it would be.

They aren’t talking to people at work any more so their social circle has shrunk, the grandkids are busier than they expected, and they aren’t walking every day or getting things checked off the infamous to do list. They have settled into this lifestyle that doesn’t exactly measure up to this amazing image they once had about it. They have discounted the value of things that work gave them and feel flat and out of sorts… and most importantly they don’t know why.

Retirement has suddenly become complex. The issue at hand is that no one told them they need a written non-financial plan to replace these things from work. As you might expect, just as complexity causes emotional burdens in traditional retirement planning, so too is the case here.

Clients can start to feel socially isolated, not valued or appreciated, and the worst part is, they don’t know who to turn to because once again, retirement is supposed to be this picture-perfect time of life. So, they suffer in silence and struggle to pivot out of the situation. Some return to work, others self-medicate, and some simply sit in front of the television all day.

The harsh reality is, that many clients have no idea that this can happen to them. Technically speaking, clients know that postponing financial decisions can carry future costs and be problematic, but no one has told them that not being proactive about the non-financial aspects can be just as devastating as well. It’s a secret we can no longer keep from clients. 

I also want to add that I’m not saying that this happens to every client or that retirement is a bad thing. I’m simply suggesting that if we are going to use science and psychology to help clients become better savers or make better investment choices, then we should be applying the same logic to their everyday life in retirement.

Advisors need to know that when it comes to planning for everyday life in retirement, clients have poor and sometimes unrealistic assumptions about how they will use their time in retirement or replace their work identity. Additionally, they don’t realize that they need to develop a new skills and habits outside of those used at work to make the most of their life during this transition—skills and habits that include specific strategies to stay relevant, connected and physically active.

You as a trusted professional can have a major impact on how well clients can go from work life to home life. That means discussing things like behavior defaults, biases, loss-aversion, and temporal discounting when it comes to a client’s mental, social, physical and spiritual factors of retirement.

In essence I am talking about retirement literacy. Educating people on every aspect of retirement, which once again is one of the hallmarks of behavioral economics… the belief that people make better decisions when they have the right information, at the right time and with the opportunity to receive prompt feedback.

In the end, we need to consider they ways in which we work with and discuss retirement planning with clients.  Advisors don’t have to jump in full force and start quoting scientific research and journals, but rather discussing the realities of retirement—what I call vaccinating clients or introducing some of the negative things that can happen, in small doses, so they can start to build up defenses against them.

After all, a successful retirement isn’t one without problems, but rather one in which you learn to overcome them. And understanding the behavioral economics of everyday life in retirement can help do that for you and your clients.

Robert Laura is the president of Wealth & Wellness Group, the founder of RetirementProject.org and a pioneer in Certified Retirement Coach training. He can be reached at [email protected].