Behavioral Economics Studies May Provide the Answer
Numerous examples have shown that many people often fail to make a good decision, even when they KNOW it is a good decision. I can name countless examples from my own life: not playing hockey as a kid, the job I didn’t take early on, the stock I didn’t buy, the stock I didn’t HOLD ON to:), not studying abroad in college, slacking off on foreign language lessons – all of these ‘failures to decide’ have certainly cost me.
Which got me thinking about the people I encounter in my work – people who people who are worried and need to take some action on their retirement planning!
“If people are truly worried, why are worried people not taking action to secure their retirement?”
My brain immediately launched into all kinds of reasons. I would have to guess that fear of doing something wrong is one of the big factors – and with the recent history of the financial markets, I can’t blame someone for having this fear of making a mistake.
I have to come to realize that information overload has exacerbated this fear and caused some serious paralysis by analysis. What do I mean? I mean that the following influences:
- the internet
- endless direct mail financial seminar invitations
- mindless financial news channels/shows
- know-it-all friends who view/read the above sources
- 401(k) brochures from the HR department
- financial shows on the local AM station
- and many more
have caused many people to have trouble making decisions because these influencers offer too many choices, which some psychological studies show leads to inability to make decisions easily. In fact many well-regarded economists and psychologists have studied some form of what they call Behavioral Economics to try to understand the rationality or irrationality of human decision making.
The Sales Industry Combats Paralysis by Analysis
Businesspeople have studied this problem in many ways also. To prevent information overload in marketing, business strategy has had to come
up with ideas to get people to buy their product among a sea of competitors. For example, classic sales trainer Tom Hopkins coaches his sales students to offer people alternate choices, or at most a “triplicate” of choice. The alternate choice strategy leads buyers to one of two solutions, both of which usually mean a sale is made. The Triplicate of choice method is designed to make people pick the one in the middle, which is typically the choice that the salesperson believes is best for the customer.
What Can We Learn to Help People Focus on Retirement Planning?
I think it would help people to understand how their brain is working against themselves – how our psychological reactions prevent us from taking positive action.
Furthermore, people need to understand that if they are bombarded with dozens, if not hundreds of choices, it is likely no decision (good or bad) will be made – even if doing something is the best things for us.
It would also be helpful to explain that It often feels safer to do nothing, but that doing nothing can be dangerous. Let’s take an example of estate & legal planning. If we do no estate planning, we don’t feel any different – our current life doesnt change. However, if we were suddenly sued, and our assets were not protected in a way that legal planning might have prevented, we will then wish we did our estate/legal planning as a judgement takes away our life savings.
This also works with health. If you or I were to eat a bucket of friend chicken every day, we likely wouldn’t feel much different over the next couple of weeks (or we might:). However, if we did this for many years, we might increase the chance of clogged arteries and a stroke or heart attack at a relatively young age. Just because we don’t feel it now, it could KILL us later.
This brings Us to Retirement Income Planning and Taking Action
A very large number of baby boomers and the ‘silent generation’ are standing on shaky ground. And I think they are being held back by normal human behavior. Understand the following points:
- People should know that they have a right to be afraid – and a healthy skpeticism due to massive stock and real estate market crashes is totally understandable. With that said, there is still a looming problem of retirement income security.
- People also should know and understand how their mind works, how most humans think and how paralysis by analysis is a common problem – if this is you, you have lots of company!
- People need to see the actual problem – and in my experience, many people in the boomer age group will need to work a lot longer than they desire. I have come to realize that most baby boomers don’t want to fully “retire,” but most do want to leave the ‘responsible‘ job they’ve worked for 25+ years in order to work someplace more fun, more flexible, and/or more meaningful, typically on a part-time basis.
- People need to be aware of the fact that many don’t have enough money to take significant stock market risk and therefore need to develop a plan which includes building up a solid “floor,” before going for “upside” by investing their IRA’s and 401(k)’s in the market (see my page from Financial 101 on this topic here).
- People need to figure this out sooner vs later so that if they’re at risk, they can take action earlier to build that income floor, to cut expenses, to plan out their career decisions better and for lifestyle planning.
And as far as people in my field are concerned, I believe that:
- Retirement Planning Advisors need to help clients understand these problems and outline possible solutions in ways that the people they serve can understand.
- Retirement Planners need to be versed in various ways to create solid income streams for clients, from those with $175,000 in their 401(k) to those with $1,750,000 in their retirement accounts. Customized solutions are available and it comes from knowing the product market, and knowing the client and putting the right combination together. It’s not about selling a product!
My hope is that in this new world, post-enormous stock and real estate crashes, with expenses rising more than government economists try to tell us they are, with jobs getting axed, no pay-raises, and lack of pensions, retirement planners can work together with their clients to offer solid retirement planning help to the generations closer to retirement – especially those among us who have little time to make mistakes.
I am taking this to heart – I am working on ways to improve my communications with people as I have seen many people that could use my help but have also seen many not take it (maybe it was just me!). Whether or not people come work with me, I want to help them be in the best position to make great decisions and feel more secure. I don’t want fear of making a mistake, or fear of the unknown, which kept me from so many opportunities in my past, to be what keeps the people I serve from retiring in comfort and dignity. Thanks for reading. Do you have any comments? Please share below…tx:)