Visualise your future to get your retirement plan on track

People who can see themselves as older tend to save more for their golden years

Nearly a quarter of Americans say they never plan to retire, which may cause them issues later in life when the realities of ageing kick in. Getty Images
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One in four Americans don't plan to retire

Nearly a quarter of Americans say they never plan to retire, according to a poll that suggests a disconnection between individuals' retirement plans and the realities of ageing in the workforce.

Experts say illness, injury, layoffs and caregiving responsibilities often force older workers to leave their jobs sooner than they'd like.

According to the poll from The Associated Press-NORC Centre for Public Affairs Research, 23 per cent of workers, including nearly two in 10 of those over 50, don't expect to stop working. Roughly another quarter of Americans say they will continue working beyond their 65th birthday.

According to government data, about one in five people 65 and older was working or actively looking for a job in June. The study surveyed 1,423 adults in February this year.

For many, money has a lot to do with the decision to keep working.

"The average retirement age that we see in the data has gone up a little bit, but it hasn't gone up that much," says Anqi Chen, assistant director of savings research at the Centre for Retirement Research at Boston College. "So people have to live in retirement much longer, and they may not have enough assets to support themselves in retirement."

When asked how financially comfortable they feel about retirement, 14 per cent of Americans under the age of 50 and 29 per cent over 50 say they feel extremely or very prepared, according to the poll. About another four in 10 older adults say they do feel somewhat prepared, while just about one-third feel unprepared. 

"One of the things about thinking about never retiring is that you didn't save a whole lot of money," says Ronni Bennett, 78, who was pushed out of her job as a New York City-based website editor at 63.

She searched for work in the immediate aftermath of her layoff, a process she describes as akin to "banging my head against a wall." Finding Manhattan too expensive without a steady stream of income, she eventually moved to Portland, Maine. A few years later, she moved again, to Lake Oswego, Oregon. "Sometimes I fantasise that if I win the lottery, I'd go back to New York," says Ms Bennett.

 

If you are of a certain age or inclination, take a moment to reflect on the future – more specifically, your future.

Then take a look at how you can hack your retirement. Now some of this has applications in how you manage your leisure time or everyday consumer purchases. For that we can thank behavioural economics, a transformative science whose proponents – folks like Richard Thaler, Robert Shiller, and Danny Kahneman – have won Nobel prizes and changed how we think about decision-making. But there are so many psychological and behavioural aspects to investing, so here we will focus on retirement planning. Here's how to start:

Visualise yourself as older

People who can see themselves as older tend to save more for retirement. Even better than that, just imagine yourself with grey hair. Some researchers have used computers to generate images of individuals, showing how they will look decades from now. In multiple studies, participants who are shown realistic computer renderings of their future selves devoted more resources toward retirement savings.

Neuro-economists like Colin Camerer, professor of behavioural finance and economics at the California Institute of Technology, uses technologies to create immersive hyper-realistic imaging to help people “better imagine what various futures might be like".

Once people see a life-like realism of their future, it leads to profound changes in how they allocate assets. They save and invest more, and generally change their behaviour as if saving for retirement is actually important to them.

Nudge your employers

This one is more for employers across the globe, who should make changes in the default settings of corporate retirement plans to improve outcomes for workers. Consider these three simple change: make enrollment automatic for all new employees at the company; deductions from wages are programmed into payroll, and workers must opt out if they wish to avoid saving. Second, set a qualified default investment alternative, typically a target-date mutual fund, which automatically invests the dollars rather than letting the cash pile up in a money-market account. Last, use an automatic step-up to raise employees' plan contributions based on either time with the company or salary increases. Better designed corporate retirement accounts go a long way to overcoming all manner bad behavioural biases.

Put your plan in writing

While there is definitely value in having a financial plan, let's go one step beyond that to understand why you not only want a plan, but also want your investment strategy to be in writing.

Robert Cialdini, professor emeritus of psychology and marketing at Arizona State University, has pointed out that people prefer to be consistent before making a commitment – and a written statement is a strong commitment. In his book, Influence: The Psychology of Persuasion, he notes, "Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment."  Investors can take advantage of this desire for consistency to help guide their future behaviour now.

Avoid the tyranny of too much choice

In his 2004 book The Paradox of Choice, Barry Schwartz notes that although "modern Americans have more choice than any group of people ever has before, and thus, presumably, more freedom and autonomy, we don't seem to be benefitting from it psychologically".  Every stock-picking investor knows this by its Wall Street nickname, "paralysis by analysis".

The solution is to keep the number of options limited. For those that create employee savings plans, it means not overwhelming participants with too many options to ensure they are not overwhelmed.

Anticipate the shift from accumulation to distribution

One of the hardest things investors have to do is mentally make the shift from working and saving to retirement and spending. It’s the reversal of a lifetime of good economic habits.

Too many people in retirement who have substantial savings are fearful of running out of money. With longevity for many people increasing, it's a real concern. Use software or a financial adviser to create a plan that will calculate your lifetime needs and future spending requirements. Figure out exactly what is leftover, and don’t be afraid to spend it. Use your excess to travel, donate to charity, give money to grandchildren, whatever brings you satisfaction.

That is the beauty of behavioural finance: using what we have learned to improve decision-making.

Barry Ritholtz founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of Bailout Nation.

* Bloomberg

One in four Americans don't plan to retire

Nearly a quarter of Americans say they never plan to retire, according to a poll that suggests a disconnection between individuals' retirement plans and the realities of ageing in the workforce.

Experts say illness, injury, layoffs and caregiving responsibilities often force older workers to leave their jobs sooner than they'd like.

According to the poll from The Associated Press-NORC Centre for Public Affairs Research, 23 per cent of workers, including nearly two in 10 of those over 50, don't expect to stop working. Roughly another quarter of Americans say they will continue working beyond their 65th birthday.

According to government data, about one in five people 65 and older was working or actively looking for a job in June. The study surveyed 1,423 adults in February this year.

For many, money has a lot to do with the decision to keep working.

"The average retirement age that we see in the data has gone up a little bit, but it hasn't gone up that much," says Anqi Chen, assistant director of savings research at the Centre for Retirement Research at Boston College. "So people have to live in retirement much longer, and they may not have enough assets to support themselves in retirement."

When asked how financially comfortable they feel about retirement, 14 per cent of Americans under the age of 50 and 29 per cent over 50 say they feel extremely or very prepared, according to the poll. About another four in 10 older adults say they do feel somewhat prepared, while just about one-third feel unprepared. 

"One of the things about thinking about never retiring is that you didn't save a whole lot of money," says Ronni Bennett, 78, who was pushed out of her job as a New York City-based website editor at 63.

She searched for work in the immediate aftermath of her layoff, a process she describes as akin to "banging my head against a wall." Finding Manhattan too expensive without a steady stream of income, she eventually moved to Portland, Maine. A few years later, she moved again, to Lake Oswego, Oregon. "Sometimes I fantasise that if I win the lottery, I'd go back to New York," says Ms Bennett.