Yahoo News, September 22nd, 2010
With stock returns projected to be low and pensions going the way of
Lindsay Lohan’s career, retirement planning can seem awfully daunting
these days. You can’t change the market or your employer’s largesse.
But
there is one factor you can do something about: you. You can be your
own worst enemy, buying what’s hot only to sell in a panic or wildly
overestimating how long your money will last.
“Our brains are
hardwired in ways that are the opposite of what we need to invest well,”
says Carnegie Mellon economics and psychology professor George
Loewenstein.
Fortunately, a new wave of research is emerging from
the still-young field of behavioral finance — a blend of psychology,
neuroscience, and economics — that gives better insight into how your
unconscious can help or hurt your financial future.
Though much of
the work is still in progress (retiree avatars, anyone?), it suggests
specific moves you can make before and during retirement to avoid your
worst tendencies and get the most from your best intentions.
Secret #1: Get a good picture of the future you
You
probably imagine that when you’re retired, you’ll be pretty much like
you are now — maybe with a new fondness for early-bird specials and PBS
wellness shows. But studies show that the present-day you doesn’t
really identify with this future person very much.
In fact, “your
mind creates neural patterns similar to those created when you think
about a stranger,” says Northwestern University researcher Hal
Ersner-Hershfield. That disconnect means you’re reluctant to trade
rewards today for rewards tomorrow — the biggest hurdle to saving for
retirement.
Behavioral scientists wondered: Could creating a
better picture of your older self help you improve focus on your
long-term goals? Researchers at Stanford University recently tested that
question.
They put two groups of college students in virtual
reality headgear and had them interact with life-size versions of
themselves. (Each student shared a room with his or her avatar, which
mirrored that person’s movements.)
One group of students saw
themselves at their current age; the other saw themselves age-morphed to
appear 70 years old. Then the researchers asked how much the students
would save for retirement. Those in the latter group said they would
save twice as much, on average, as the other.
Experts are now
building online tools to help you do such visualizations. Example:
Ersner-Hershfield and colleagues are testing software that changes your
photo as you move a slider to select different savings levels.
If
you choose a low savings rate, your current photo will look happy (I can
spend more now!), but your older one will look sad (my nest egg is
shrinking!). So far they’ve found that people who see older, sadder
versions of themselves choose to save 6.75% of salary, on average, vs.
5.2%.
Put these findings into action:
Write it down. While
you’re waiting for such a slider to hit the Net, do a lower-tech
exercise. Imagine the retirement future you want — house by the lake?
annual trips to Italy? worry-free sleep? — in as much detail as
possible. Then write down how you feel about that future. “It’s not just
imagining, but the act of writing, that helps you to focus your
thoughts and take action,” says Alessandro Previtero of the Ivey School
at the University of Western Ontario.
Retirement Calculator: The biggest secret to a rich retirement? Planning. Having a proper plan will make your retirement work like nothing else will. Towards that end, our retirement calculator can help you plan your retirement out the way you will need it to be.
