How We Sabotage Our Financial Decisions

The very thought process that helps people to be youthful and vibrant can actually sabotage their finances. We are told that in order to stay young we should surround ourselves with younger people, think positive, and not complain about our ailments.  I certainly agree with all of those sayings, especially the “don’t complain” part.  This way of thinking reminds me of something I heard about weight loss, “If you want to be thin, hang out with thin people.”  You end up going for a walk instead of eating fried potato skins at happy hour, which of course results in eating less and exercising more.  Younger people in general tend to be more open to new ideas and pick up new technology so associating with them can help to keep your mind stimulated, which can certainly enhance the quality of your life.

Financial planning requires a different line of thinking– planning that you will indeed get old.  You have to assume you will be frail, have a lack of energy and have many more senior moments than you do now.  In other words, you aren’t going to be in the same place physically and mentally in the future and you have to plan for it. Janet Novack writes in a recent blog post that Baby Boomers are in for a health shock and she quotes a recent study by the Robert Wood Johnson Foundation that found there is a disconnect with how pre-retirees estimate their health in retirement, with only 13% predicting their health will decline but 39% of retirees report their health is actually worse in retirement.  Many people assume they can simply work in retirement and that way of thinking may sell them short, sabotaging their retirement planning.

People also overestimate their investment ability today.  A recent study from the Center for Financial Security at the University of Wisconsin Madison found the pre-retirees they sampled to be poor at self-assessing their financial knowledge. What’s more, groups with higher levels of wealth and education show evidence of being least self-aware. Since more and more financial decisions and responsibility for retirement savings are being placed on the employee, a solid grasp of the basics of financial literacy is necessary to have.  If pre-retirees are assessing their financial ability “through rose colored glasses,” I have trouble imagining they are dreaming their capacity may diminish with age.

Getting solid investment returns becomes more difficult as you get older because financial needs change.  The needs of an eighty year old are much different than a sixty five year old. The eighty year old is more sensitive to fluctuation in principal so dividend paying stocks or corporate bonds may no longer be an appropriate investment for them while the sixty five year old may view these as relatively conservative investments.  It is much more challenging to provide income streams to retirees as they get older but many people project their returns on their risk tolerance today.

With long term goal planning, take into account that your future needs will most likely change:

For example, I fielded a call to our financial helpline last week from a woman whose pension is freezing at the end of the year and she had to make a decision of whether to take a regular monthly income as an annuity or to roll it over to an IRA Rollover account to manage it herself.  She was in her late 60’s and we discussed the pro’s and con’s of her choices.  She started out basing her decision (as many people do) on her needs today.  The idea of access to her principal and being able to have a great deal of flexibility in her investment choices appealed to her.

When we talked about how she might feel differently at age 70 and then age 80, the right choice for her became very clear. She might prefer flexibility and access today. However, thinking as an 80 year old, she liked the guaranteed monthly income and the fact she didn’t have to be concerned about how the underlying investment performed – a much different set of concerns than a 65 year old has.

Choose investments that will grow with you:

Over the course of my twenty five year career in financial planning, I’ve seen people make the mistake of making financial choices and choosing investments that may not be suitable in the near future.  Here is an example: a friend of mine in his early thirties who was single bought a delightful but very tiny two bedroom cottage home in California.  Today, three years later, he is married with a two year old daughter and desperately wants a baby brother (or sister) for her.  His house is really too small for his growing family and the real estate market is not cooperating with his desire to sell it and move to a bigger house.  In hindsight, if he’d have just looked at this long term investment – buying a home–  with his long term needs in mind – living in it with a family of four or more, not just one — he might have made a better financial decision.

Plan for the worst scenario, not the best:

Especially in today’s economy, with the triple threats to retirement, many people assume they’ll just work a few more years but that may not be possible.  It might sound like a great idea now if you are employed in a job you enjoy and your health is good but you can’t count on either.  You may just get to 62 or 65 and want to call it quits. A friend of mine, who is in his early sixties, was an administrator in the skilled nursing business and recently left his position – he just quit his job.   He is actively looking for work now and is healthy enough to work until age 65 but isn’t sure he wants to work in his field anymore.  The stress of the hospital got to him.

It is difficult enough to manage a hospital because it is a 24/7 business. His phone can ring anytime.  When it does, it’s never good.  He can never truly enjoy a relaxing evening or even a weekend away because the hospital is always in the back of his mind.  Also the business has changed over the years in that state regulations have become more and more stringent, adding increased pressure.  His plan originally had been to keep working in his field and probably never retire.  Those plans have changed for him.  Assume yours will also.

Our culture celebrates youth and rugged individualism but in the case of making financial decisions, consider how we may change our views in the future. If that is difficult to do, seek council. Ask someone who is in that life stage now how it is for them.  I appreciate my friends who are either older than me or have taken a step before me such as sending their youngest child off to college or turning fifty  because I can learn from their experiences.  Ask questions and keep an open mind because even though you don’t think you will, you may change your mind when you get to the stage they are.  Walk a few miles in someone else’s shoes to gain perspective. Doing so may just give you the insights needed to better plan your finances and subsequently your life in a way that brings you a deeper level of satisfaction.

Nancy Anderson - Forbes