Psychology has found its way into finance, and it’s a good fit. Behavioral economists design systems that nudge people into making the right decisions. For instance, workers save significantly more when the default is paycheck deductions into their retirement account. This type of “opt-out” policy, versus an “opt-in” standard of having to choose to participate, has gained popularity with both employers and employees.
Each of us approaches retirement in different circumstances. Some started retirement accounts with their first paycheck. Others came later to retirement saving, but were lucky or skilled in bringing home not just the bacon, but a whole hog. Whether by changed circumstances or procrastination, the majority of baby boomers are not on track to retire any time soon.
According to a new report by the Stanford Center on Longevity, “Baby boomer generation members hold less wealth, are deeper in debt and will face higher expenses than retirees a decade older than them.” A 2014 meta-analysis of several surveys found that almost one third of boomers, then averaging 58 years of age, had no money saved in retirement. Those with savings showed a median balance of around $200,000. This is a small fraction of what is needed to support a typical 30-year retirement.
The key to bridging this gap is to focus on what is under your control. Starting from where you are now, take charge of your finances, your health, and ultimately your happiness.
Longevity, both financial and physical
Giving yourself a bigger retirement paycheck means one or a combination of the four changes in the sidebar. If all of these seem onerous, you can consider the tricks of behavioral economics to put them within your reach.
Say you’re considering retiring because you’re tired of your work, or you’re just tired. It may be that, like many boomers, you have grown accustomed to being sedentary. You can incentivize yourself with the knowledge that staying in the work force will keep you physically active, for better health. Then tweak your work day to incorporate getting up and around at least once an hour.
At all ages, say the experts, activity is related to improved cognition, reduced anxiety, and better sleep quality. For older adults, activity means a reduced risk of dementia and cognitive impairment. Even small amounts of exercise like climbing the stairs count toward a recommended goal of at least 150 minutes per week of moderate to vigorous activity.
Longevity is a two-edged sword. You have to be healthy to enjoy it. Health in your 70s and 80s is a combination of luck, fortitude and attitude. As long as your heart is still beating, though, you can take steps to improve your health and attitude. Wouldn’t you love in your 20s to have heard the advice you can now offer?
Assess your strengths and put them to work at a higher level, so that the world can take advantage of your life experience.
Spending less is a crucial component of improving your chances of a comfortable retirement.
Trimming your budget pays you double: you save more now, and your retirement budget “needs” will be smaller when you adopt thrifty behaviors.
Two behavioral tricks of the trade can help. First, determine a per-paycheck savings amount that will get you closer to your goals. Immediately deposit that amount into retirement savings each paycheck before paying any other bills. Your variable budget items will be forced to fall into place behind the needs of your future self.
Secondly, post an age-progressed photo of yourself on the bathroom mirror. (You can order one on the internet.) Tell your future self each morning that you are watching your spending for her (or him).
Earning more on your investments can be tricky. I don’t recommend seniors deposit their retirement funds in high risk investments. In fact, your portfolio should be the most conservatively invested starting five years before retirement until five years after.
If you’re like most folk, however, you haven’t paid much attention to your retirement accounts. The accounts are likely heavy with outdated management fees, stocks that are well past blue chip, and bonds from the years they earned practically nothing. Get a “physical” on your portfolio by seeing a fee-only financial advisor to make sure your money is safely working for you.
If you’re not yet on track in your retirement savings, behavioral economics can help you adjust your personal habits. Help yourself opt-in to a healthy retirement.
Keys to improving your financial position for happy, healthy longevity:
1. Stay in the workforce longer.
2. Earn more in your current occupation (or change occupations).
3. Spend less (and invest the savings in your retirement accounts).
4. Improve the rate of return on your investments.
Karen Telleen-Lawton is a Certified Financial Planner professional.
