The science behind why saving for retirement is hard and what to do about it

"The majority of Americans—59% according to a 2019 study by Charles Schwab—say they live paycheck to paycheck, making saving money a challenge. But beyond the that, there are lots of reasons why people don’t prioritize planning for their future, even though they know they should. It’s here where research in behavioral science can help" writes David Hoffeld.

"One of the primary reasons why we don’t make choices that set ourselves up for a secure retirement is because of how our brains are wired. Each of us has cognitive biases that lead us astray. Yet, by understanding these biases, you can make sure that you do not fall under their influence."

Bias #1: Temporal discounting 
(aka time preference) is a tendency to give greater value to rewards received sooner compared to much larger rewards if one is willing to wait.We are willing to settle for a small reward today rather than wait for a much larger reward in the future.  If you've heard about the "marshmallow test" of delayed gratification with preschoolers, you know what I mean. See: https://www.thoughtco.com/the-marshmallow-test-4707284
Adults who cash out retirement savings when changing jobs suffer from

Bias #2: Loss aversion 
Investors tend to prefer avoiding losses over achieving equivalent gains.
Suppose you decide to move your investments to “safe harbor” accounts (think money markets and CDs) to avoid potential losses in a down market. The longer you stay in these kinds of accounts, the more you risk losing some of your purchasing power to inflation. How do you know when to reinvest in the market?

Bias #3: Recency bias
Recency bias occurs when an investor tends to weigh recent events more heavily than earlier events. They think the recent past will repeat itself in the near future so investors look at what investments did well in the recent past and move their money into those investments at peak prices. See: The Callan Table for a visual example of how investment categories vary over the decades.

Confirmation bias occurs when we favor information that reinforces the things we already believe. It’s a common phenomenon in how we choose our news sources (think FOX vs. CNN), and it’s also common in investing.


Get the details:
https://www.fastcompany.com/90453952/the-science-behind-why-saving-for-retirement-is-hard

OK... now what can you do to address these threats to your financial security?

The Top 3 Blind Spots That Keep You from Building Wealth 

 "DALBAR’s Quantitative Analysis of Investor Behavior study tracks investor returns and finds consistently that the average investor earns much less than market indices suggest. For example, according to DALBAR, the average investor lost 9.42% in 2018, compared to losses by the S&P 500 of only 4.38%. Why? DALBAR attributed the loss to investor behavior ­­— avoiding market volatility by decreasing exposure, and even losing more money by being out of the market during periods of gains."

"How to avoid recency bias: Look for context in long-term trends, not just recent headlines, to provide perspective. If you have worked with your adviser to create a financial plan, stick to it. Jumping in and out of the market places you at greater risk. As David Booth of Dimensional Fund Advisors puts it, “Missing out on big growth has as much of an impact on a portfolio as losing that amount. How long does it take to make that kind of loss back? And how is someone who got out supposed to know when to get back in?”

"How to avoid loss aversion: Focus on your long-term goals instead of worrying about the day-to-day ups and downs of the market. You’ll sleep better and portfolio will continue to grow over time."

"How to avoid confirmation bias: Always consider multiple viewpoints. If you work with an adviser, ask him or her to help you evaluate investments by including the pros and cons of any potential decision."

Temporal discounting

Adults who cash out retirement savings when changing jobs suffer from TD. Do a simple compound interest analysis of how much those dollars would grow if you left them invested until retirement. Teh results can be surprising.  

https://www.valuewalk.com/2020/01/investing-emotional-bias/

Dollars and sense: How we misthink money and how to spend smarter

Behavioral economist Dan Ariely's new book, Dollars and sense: How we misthink money and how to spend smarter, is now available at your favorite bookseller's and library. Logan library will soon have the book, e-book, and audio recording available for loan.
"Blending humor and behavioral economics, the New York Times bestselling author of Predictably Irrational delves into the truly illogical world of personal finance to help people better understand why they make bad financial decisions, and gives them the knowledge they need to make better ones." http://danariely.com/books/dollars-and-sense/
Check out his other books, all very entertaining, revealing and readable: http://danariely.com/books/
Ariely is director of the Center for Advanced Hindsight (not a typo). http://advanced-hindsight.com/
Check out Ariely's website: http://danariely.com/

How patient are you? What's patience got to do with finances? A lot!

"A study shows that patience correlates with positive financial outcomes more than other factors. Impatient people are more likely to have less net wealth and more poor habits, such as smoking or excessive drinking, than patient counterparts." (Retirement Security Smartbrief). According to Adam Creighton, "they say patience is a virtue; it’s probably also a blessing." "More patient people grow richer and healthier than their more impetuous peers, according to a new study that compares elderly Americans’ willingness to delay financial gratification with their personal characteristics and lifetime outcomes."
"Patience boosts wealth by much more than marriage or religion. Respondents with discount rates more than one standard deviation above the average of the sample had 29% less net wealth, a loss of around $130,000. More impatient people—similarly controlling for religion, income, race, sex, optimism and education—were more likely to smoke, drink excessively, and miss out on their flu shots and medical examinations."

How much are you willing to give up today in order to save and invest for the future? Are you always putting off to "later" financial tasks you should have accomplished years ago? It's never to late to reassess your impatience factor and put more weight on the future than on gratification today.

Our Blind Spots Cut Retirement Savings

"Our personal biases can play havoc with how we handle our finances.
Two such biases have long been suspected as obstacles to saving for retirement. The first is a tendency to procrastinate on decisions that may benefit an individual in the long run, but also involve short-term costs, like saving for retirement – economists call this 'present bias.'
The second bias is a failure to perceive the power of compounding investment returns and how this can build wealth over decades of saving." Read more about "present bias" at http://squaredawayblog.bc.edu/squared-away/our-blind-spots-cut-retirement-savings/

How visualization can help you save

Visualize your way to a better retirement with this article by Steve Vernon. "According to a recent study by TD Bank, people who visualize meeting their future goals are much more likely to succeed at achieving them."

According to the study, "people who keep images, photos or vision boards of their goals are almost twice as likely to be confident they'll meet their goals compared to people who don't (59 percent vs. 31 percent)." "How can you use psychology to improve your retirement? While you're working, imagine how you'll look and feel if you don't have to work as hard, and imagine the things you'll do with your newfound freedom. That might give you the motivation to ramp up your savings and spend more time planning for your retirement income portfolio." Give it a try! But don't forget to consider the obstacles and plan for how you will overcome them. See: http://www.cbsnews.com/news/visualize-your-way-to-a-better-retirement/

Forget the power of positive thinking!

"Positive thinking is often touted as a key to wish fulfillment: Simply envision yourself achieving your dream—and abracadabra—it will manifest!
The only problem? It doesn’t really work.
Research by Gabriele Oettingen, a psychology professor at New York University and author of Rethinking Positive Thinking: Inside the New Science of Motivation, found that people who fantasized about success—from losing weight to getting a good grade on a test—actually fared worse in the results department than those who didn’t."
"Yes, imagining a good outcome can lower your blood pressure and put you in a good mood, but as a result of feeling so satisfied, you’re less likely to take the action necessary to achieve your goal." "In other words, in order to succeed, optimistic thinking should be paired with practical methods to overcome the challenges you’ll inevitably encounter.
Based on these findings, Oettingen developed a four-step method she calls WOOP (Wish, Outcome, Obstacle, Plan) to help you bring your dreams to happy fruition." Molly Triffin explains more at: http://www.foxbusiness.com/personal-finance/2015/12/22/5-simple-steps-to-heart-happy-retirement-planning/

Are You an Ant or a Grasshopper?

"Non-savers... prefer immediate gratification while savers, no surprise, prefer future satisfaction," according to Robert Powell who explains the practical implications of behavioral psychology research. He asks: "why do some people have trouble with self-control and others not so much? And, more important, what can you do if you’re having trouble with self-control — that is, saving for retirement?" Powell translates academic research into easy to understand concepts to help you change your behavior by using "commitment devices" such as “goal clarification, self-evaluation, and deadline setting." Check out these sensible strategies at: http://www.marketwatch.com/story/dont-put-off-saving-for-retirement-2014-01-18?pagenumber=1