May 1, 2019 • Robert Laura
That if I told you clients don’t always make retirement decisions that are in their best interest? What if I said I could explain why some clients thrive while other clients struggle with their new life in retirement? Or what if I suggested that our industry’s overreliance on financial factors to help clients make retirement decisions is a major reason a growing number of people are failing at those decisions? These are questions that help us understand the role behavioral economics can play in retirement decisions. Like behavioral finance, the field of behavioral economics combines insights about psychology, economics and people’s judgment and decision-making to generate a more accurate understanding of human behavior. And the field can make people’s retirement choices more personal, not just another portrait of dollars and cents. If you search for the term “behavioral economics,” you will come across a litany of articles and stories about it and retirement planning. But these articles mostly address financial items. This article takes a completely different stance and frames these concepts in non-financial situations. One of the hallmarks of behavioral economics is the belief that people make better decisions when they have the right information, at the right time and when they can get prompt feedback. Yet when advisors assure clients that they can retire and stay retired under current savings and financial projections, they are not giving the client all the information they need to make informed decisions about the next stage of life. As a result, they are setting clients up to stumble, if not completely fall flat on their face, during the transition. Let’s look at the science behind it. Behavioral economics suggests there are two types of decisions we make: “System 1,” or automatic decisions, and “System 2,” or reflective decisions. System 1 decisions are very intuitive and commonly associated with gut feelings. When someone throws a ball at you and you duck, that’s a System 1 response. It’s instinctual, meaning you don’t have to think about it. System 2 decisions are more reflective. If I were to ask you to multiply 250 times 311, you would have to stop and think it through—picturing the problem and following a set of rules or guides to go through it. Reflective decisions take more time and effort. When it comes to traditional retirement planning, many advisors and clients would agree that it is a System 2, reflective decision. It has a lot of moving parts to think through and consider. So advisors and clients spend a lot of time going over a variety of scenarios and options in an effort to help the client feel confident about the decision to leave the workplace. But here’s the issue, and it’s a big one: Not all retirement decisions are reflective. The non-financial parts, such as coming up with a new work identity, filling your time and staying mentally and physically active in retirement, tend to be System 1 decisions. People assume the personal aspects of life will automatically fall into place if they have enough money and the right asset allocation and they are at retirement age. But nothing could be further from the truth—and this is exactly why people not only fail at retirement but also struggle to figure out where they went wrong. First « 1 2 3 » Next
That if I told you clients don’t always make retirement decisions that are in their best interest? What if I said I could explain why some clients thrive while other clients struggle with their new life in retirement? Or what if I suggested that our industry’s overreliance on financial factors to help clients make retirement decisions is a major reason a growing number of people are failing at those decisions?
These are questions that help us understand the role behavioral economics can play in retirement decisions. Like behavioral finance, the field of behavioral economics combines insights about psychology, economics and people’s judgment and decision-making to generate a more accurate understanding of human behavior. And the field can make people’s retirement choices more personal, not just another portrait of dollars and cents.
If you search for the term “behavioral economics,” you will come across a litany of articles and stories about it and retirement planning. But these articles mostly address financial items. This article takes a completely different stance and frames these concepts in non-financial situations.
One of the hallmarks of behavioral economics is the belief that people make better decisions when they have the right information, at the right time and when they can get prompt feedback. Yet when advisors assure clients that they can retire and stay retired under current savings and financial projections, they are not giving the client all the information they need to make informed decisions about the next stage of life. As a result, they are setting clients up to stumble, if not completely fall flat on their face, during the transition.
Let’s look at the science behind it. Behavioral economics suggests there are two types of decisions we make: “System 1,” or automatic decisions, and “System 2,” or reflective decisions. System 1 decisions are very intuitive and commonly associated with gut feelings. When someone throws a ball at you and you duck, that’s a System 1 response. It’s instinctual, meaning you don’t have to think about it.
System 2 decisions are more reflective. If I were to ask you to multiply 250 times 311, you would have to stop and think it through—picturing the problem and following a set of rules or guides to go through it. Reflective decisions take more time and effort.
When it comes to traditional retirement planning, many advisors and clients would agree that it is a System 2, reflective decision. It has a lot of moving parts to think through and consider. So advisors and clients spend a lot of time going over a variety of scenarios and options in an effort to help the client feel confident about the decision to leave the workplace.
But here’s the issue, and it’s a big one: Not all retirement decisions are reflective. The non-financial parts, such as coming up with a new work identity, filling your time and staying mentally and physically active in retirement, tend to be System 1 decisions. People assume the personal aspects of life will automatically fall into place if they have enough money and the right asset allocation and they are at retirement age.
But nothing could be further from the truth—and this is exactly why people not only fail at retirement but also struggle to figure out where they went wrong.
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