Understanding the Psychology of Retirement Planning

How a lifetime of financial behavior—earning, saving, investing—ultimately affects your retirement.

By + More

Perhaps one of the greatest financial missteps people make is believing that retirement is an event or a "zone" one enters later in life. So says Gregory Salsbury, author of Retirementology: Rethinking the American Dream in a New Economy. Salsbury sees it more as a process: "All of your financial behavior—earning, saving, borrowing, investing—impacts your retirement. It begins as soon as you're able to put money away, not sometime in the future," he says. "People often think they don't have to worry about retirement because they're not yet in the zone—they still have 20, 30, 40 years to worry about it."

In his book, Salsbury examines how psychology plays into financial choices that can have dire consequences down the road. U.S. News recently spoke with Salsbury about the psychology behind retirement planning, including mistakes people make early on that can affect retirement. Excerpts:

[See U.S. News's list of The 100 Best Mutual Funds for the Long Term, and use our Mutual Fund Score to find the best investments for you.]

What's behind Retirementology ?

Retirementology is about blending behavioral finance with retirement planning in the aftermath of the financial crisis. When it comes to money, people don't always make decisions rationally. They'll drive 30 minutes to use a $2 coupon. They will hold onto a stock for longer than they should because they inherited it from their grandmother ... When it comes to money, it's not supposed to be black and white. These same mindsets can also be applied to retirement planning ... The financial meltdown has been a perfect theater for all the bad behavior to display itself so clearly ... what people have done over the past 10 years has ultimately been detrimental to their retirement preparedness.

The impact was partially brought on by the bad behavior—people viewed their homes as ATM machines, thinking they'd do nothing but appreciate, and people became emboldened. 'By the way, I don't have to worry about retirement because this house will be my retirement.' Forty percent of mortgages, for example, in 2005 were for non-owner occupied homes. So people are now having to revisit their expectations for retirement—when they retire, what kind lifestyle will they have, and how much family support will they have for their aging parents. If had to wrap it up with a ribbon, one of the major themes in the book is trying to get people to stop looking at retirement as a zone and see it as a more holistic process.

In the book, I offer a new vocabulary to try to get them to grasp these sometimes very complicated concepts. Equimortis: The dangerous condition of relying on the equity of one's home to fund retirement. Bingefy: The tendency to splurge after being frugal. You give up your daily Starbucks coffee and then feel justified to bingefy on a trip to Hawaii.

[U.S. News's highlights The Best—And Worst—Places to Build a Nest Egg.]

What is your solution to help people curb this bad financial behavior?

Seek a financial adviser sooner rather than later. Too many people try to do this on their own. It's far more complicated than they think. The wisest advisers in the industry know that the biggest challenge is not investment management—it's investor management. The difference between a given product, or choosing an investment, is not nearly as impactful as the errors of investing—bailing out of an investment at exactly the wrong time, waiting too long to reinvest, trading portfolio positions too often trying to pick winners, not saving consistently.

When should you get an adviser?

As soon as you can start saving. Working with an advisor should begin as early in your retirement planning process as possible.

But young people often don't have a lot of money to spend.

It costs money, but so do brain surgeons. Would you entrust someone who is not a surgeon to conduct your operation? You need to choose your adviser wisely, of course, but I try to stress that retirement planning is a complicated endeavor that should be undertaken with professional assistance.