Understanding the Psychology of Retirement Planning

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

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What other advice do you have for retirement savers?

Automation is key. If I ask you how much you earned last or this year, my bet is that you'd immediately think of a gross number—$50,000, $100,00, whatever, but it's not true. After taxes, it's dramatically less. People don't think of that. The beauty of automatic withholding is that you can make saving and investing more painless.

People need to educate themselves on the classic errors and think about future dollars. If you're 50 today, think about how every dollar you spend is $7 or $8 that you won't have in your retirement account because of the time-value of money and inflation, if you invest it instead of spending it.

A car purchase is a common example. A young couple is thinking about spending $25,000 on a new car versus a very nice, preowned car that will last every bit as long for $12,000. They don't think about that as a retirement decision. They think about it as a transportation decision. Should you spend it or put it in an account? The only question they think about in whether they should spend $12,000 or $25,000 is 'Do we have $25,000?'

What can people nearing or of traditional retirement age—who have seen their savings crushed or haven't' saved enough—do?

Because of their behavior and age, they are basically at the mercy of the prevailing social welfare systems ... Unfortunately, some 40 percent of Americans have essentially saved nothing for retirement. My intent with the book is to help investors understand some of these past mistakes, and start thinking about what they can do to take personal responsibility for their retirement preparedness moving forward.

Where do you stand on target-date funds?

They got rocked pretty bad during the meltdown. What was perhaps most disheartening is that some of the funds with the earliest horizon dates got hammered, which caused great deal of distress. A lot of research shows that they're very misused. The whole concept of a target-date fund is that it holds your entire retirement portfolio, but perhaps the lesson here is that diversification—and building a plan that is customized to your unique objectives—is important when planning for retirement.

People are looking again at annuities, which have historically not always been treated well in the mainstream media. They're looking a lot better these days ... Historically, advisers might have said to investors: 'Give me all your money and I'll design a portfolio that gives you a 90 percent chance of having money for the rest of your life.' Given the events of the last couple years, you don't want a pretty good chance, you want a guarantee.

What's the biggest mistake people make when it comes to their retirement finances?

It would be difficult to pick one, but thinking that retirement is an event—that's probably the most damaging. Seeing it as being out there at some future point and thinking you don't have to worry about it until you reach the zone.

There is a lot of marketing that promotes this concept that there's a zone, that the five years prior to retirement are somehow hypercritical. But if you understand compounding of interest, you start to see that perhaps the saving and investing decisions made at ages 20 to 24 are just as—if not more—important than the decisions made at ages 55 to 59.

This zone approach leads to one of the classic errors, which is thinking about retirement as a thing that's separate from your other finances. Retirement preparedness is impacted by all of your financial decisions. Spending, saving, investing, retirement planning—all of these issues and financial decisions are inextricably bound.