Behavioral scientists have long known that people feel the pain of loss more pronounced than the joy of winning. They call this phenomenon of loss aversion. What they are just beginning to learn, however, is that retirees are usually much more loss averse than younger people.
How much more? Columbia University business professor Eric Johnson has recently conducted a study to find out. He gathered a group of people over 60 years of age and asked them if they would take the bet: You have 50% chance to win $ 100 and a 50% chance of losing $ 10.
Almost half the people who said they would refuse to play - which means that the heavy losses 10 times heavier than gains. Moreover, previous studies showed that the population as a whole tends to weigh the losses 2-3 times stronger than gains.
Investigators still are not certain why the loss of points aversion with age. As you age, you may feel you can not afford to have hits to your wallet, because you have fewer years ahead to do for them.
Another factor may be the effect of donation (see paragraph 5), which increases their desire to hold onto something that you already have. Whatever the cause, loss aversion is a problem if it leads you to invest too conservatively in their retirement years, carrying on the bonds, avoiding stocks. Its stock is more vulnerable to inflation that way.
Now put these findings into action:
Keep your financial knowledge
Research suggests that well-educated investors are less loss-averse than the average. It will continue to monitor news and advice on retirement money, or even enroll in a class of personal finance.
Fix your mix
Anthony Ogorek, a financial adviser in Williamsville, NY, recommends that by the time you spend 60 years of age having no more than 60% of its assets in stocks, You'll be less likely to freak out and run at 100% in cash next time the market tanks.
Get an outside perspective in their later years
This may mean investing some money in a fund's life cycle back to their age or using a money manager (accessible available today through many 401 (k) plans).
Thursday, September 30, 2010
Thursday, September 23, 2010
7 secrets to a richer retirement #5 Make friends with an annuity
Many retirees should consider an immediate annuity, which begins a stream of regular fixed income for life. The advantage is not just financial: Studies show that retirees who have guaranteed income to cover some of their costs are happier than those who do not.
So why is that few people buy annuities? In part because of legitimate concerns about insurers that sell them - the rescue of AIG, certainly did not inspire confidence. But also at work is the fear of losing control, in addition to a bias called the endowment effect: It is the value that is in your power more highly than something you have not, even if something is worth so much. Annuities trigger that prejudice, because they require you to "abandon" a big chunk of money upfront.
To learn how to combat this trend, Jeffrey Brown, a finance professor at the University of Illinois, and colleagues recently tested different ways of describing the annuities for a group of people 50 and older.
A description was of a monthly income of $ 650 for life, another, a return of $ 650 for life. The same thing - but three times as many people went to the first option. "Only by changing the perspective away from wealth accumulation to produce income can make a big difference," says Brown.
Now put these findings into action:
Remember: It's all or nothing
One way to overcome their reluctance to lose control, says Harold Evensky, a financial adviser in Coral Gables, Fla., is to remember that the standard advice is to put only a portion of their retirement savings into an annuity - and to focus on income monthly trust can provide.
See if you can come across an institutional rate
Knowing that I have a good business can help lower your anxiety. And about 1,200 employers now allow their 401 (k) participants to buy immediate annuities through a service called Income Solutions at low prices that only large institutions usually get. In addition, Vanguard has just announced it will do the same for your 401 (k) and retail investors. Check with your plan to see if you qualify.
So why is that few people buy annuities? In part because of legitimate concerns about insurers that sell them - the rescue of AIG, certainly did not inspire confidence. But also at work is the fear of losing control, in addition to a bias called the endowment effect: It is the value that is in your power more highly than something you have not, even if something is worth so much. Annuities trigger that prejudice, because they require you to "abandon" a big chunk of money upfront.
To learn how to combat this trend, Jeffrey Brown, a finance professor at the University of Illinois, and colleagues recently tested different ways of describing the annuities for a group of people 50 and older.
A description was of a monthly income of $ 650 for life, another, a return of $ 650 for life. The same thing - but three times as many people went to the first option. "Only by changing the perspective away from wealth accumulation to produce income can make a big difference," says Brown.
Now put these findings into action:
Remember: It's all or nothing
One way to overcome their reluctance to lose control, says Harold Evensky, a financial adviser in Coral Gables, Fla., is to remember that the standard advice is to put only a portion of their retirement savings into an annuity - and to focus on income monthly trust can provide.
See if you can come across an institutional rate
Knowing that I have a good business can help lower your anxiety. And about 1,200 employers now allow their 401 (k) participants to buy immediate annuities through a service called Income Solutions at low prices that only large institutions usually get. In addition, Vanguard has just announced it will do the same for your 401 (k) and retail investors. Check with your plan to see if you qualify.
Wednesday, September 15, 2010
7 secrets to a richer retirement #4 Think in bite-size pieces
Use a checklist of retirement each year. For one adapted to their age group.
Your 401 (k), training likely do you think about the construction of a single tranche. But even experienced investors tend to overestimate how long that amount will last.
When you look at a dollar figure, says psychology professor Eldar Shafir of Princeton, you're inclined to focus on their nominal value, instead of its total purchasing power, which will be eroded by inflation.
Experts call this phenomenon "the illusion of money." And they come with a technique to correct this, known as reframing. Instead of focusing on the total amount, focus on the monthly incomes that will create the sum for their retirement years.
"People understand how they need money each month, so it makes the process of saving more relevant," says the professor of behavioral finance Shlomo Benartzi UCLA.
The idea is catching. financial services firm Putnam, for example, recently revamped the website and the statements for the 401 (k) plans that manages the display prominently projected monthly income instead of total balances.
Now put these findings into action:
Run the Numbers
Estimate your monthly income on retirement by using the calculator on troweprice.com. Compare that figure to what you'd like to spend. Behind? Ramp savings, cut spending or postpone retirement (or three).
Tweak your mix of investment
Inflation tame now, could increase dramatically over the years, warns Marilyn Dimitroff, a financial adviser in Bloomfield Hills, Michigan One way to limit the damage is to increase the amount of money you have in dividend-paying stocks.
Your 401 (k), training likely do you think about the construction of a single tranche. But even experienced investors tend to overestimate how long that amount will last.
When you look at a dollar figure, says psychology professor Eldar Shafir of Princeton, you're inclined to focus on their nominal value, instead of its total purchasing power, which will be eroded by inflation.
Experts call this phenomenon "the illusion of money." And they come with a technique to correct this, known as reframing. Instead of focusing on the total amount, focus on the monthly incomes that will create the sum for their retirement years.
"People understand how they need money each month, so it makes the process of saving more relevant," says the professor of behavioral finance Shlomo Benartzi UCLA.
The idea is catching. financial services firm Putnam, for example, recently revamped the website and the statements for the 401 (k) plans that manages the display prominently projected monthly income instead of total balances.
Now put these findings into action:
Run the Numbers
Estimate your monthly income on retirement by using the calculator on troweprice.com. Compare that figure to what you'd like to spend. Behind? Ramp savings, cut spending or postpone retirement (or three).
Tweak your mix of investment
Inflation tame now, could increase dramatically over the years, warns Marilyn Dimitroff, a financial adviser in Bloomfield Hills, Michigan One way to limit the damage is to increase the amount of money you have in dividend-paying stocks.
Wednesday, September 8, 2010
7 secrets to a richer retirement #3 Use reminders and checklists
Human beings are prone to distraction by immediate events -- helpful in the days when an angry wildebeest might interrupt your dinner, but not so much when you're planning for retirement. "Reminders are one of the simplest, lowest-cost ways to cut through distractions and stay focused on your goal," says Yale's Karlan.
He and other researchers working with banks in Peru, Bolivia, and the Philippines looked at the impact of sending account holders reminders to save by text message or postcard. The savers who got those messages put away as much as 16% more.
Checklists are another effective tool to help you stay on task. As Harvard surgeon Atul Gawande pointed out in his 2009 book, The Checklist Manifesto, the simple act of going through one of these lists can help you avoid missing a vital step.
When surgeons and airline pilots began using them, hospital infection rates and pilot error declined. No wonder so many financial advisers rely on checklists for clients nearing retirement.
Now put these findings into action:
Arrange automatic prompts
It's easy: Just set e-mail alerts in your digital calendar or via a personal finance website such as Mint.com. The most effective, says Karlan, are as specific as possible ("put $1,000 in my Roth IRA on Dec. 1," not "save more for retirement"). Arrange for them to hit your in-box at tax time, at bonus time, and after your year-end statements arrive (to prompt you to rebalance).
Put a reminder where you'll see it every day
Remember that Northwestern study showing that thinking about a grandparent can help you save? Study subjects wore wristbands with the acronym WWGD (What Would Grandma/Grandpa Do?) written on them. Hokey, sure -- but effective. Placing a reminder of your goal where you'll see it day in and day out (a photo of your dream retirement house by your bed, for example) could have a similar effect.
He and other researchers working with banks in Peru, Bolivia, and the Philippines looked at the impact of sending account holders reminders to save by text message or postcard. The savers who got those messages put away as much as 16% more.
Checklists are another effective tool to help you stay on task. As Harvard surgeon Atul Gawande pointed out in his 2009 book, The Checklist Manifesto, the simple act of going through one of these lists can help you avoid missing a vital step.
When surgeons and airline pilots began using them, hospital infection rates and pilot error declined. No wonder so many financial advisers rely on checklists for clients nearing retirement.
Now put these findings into action:
Arrange automatic prompts
It's easy: Just set e-mail alerts in your digital calendar or via a personal finance website such as Mint.com. The most effective, says Karlan, are as specific as possible ("put $1,000 in my Roth IRA on Dec. 1," not "save more for retirement"). Arrange for them to hit your in-box at tax time, at bonus time, and after your year-end statements arrive (to prompt you to rebalance).
Put a reminder where you'll see it every day
Remember that Northwestern study showing that thinking about a grandparent can help you save? Study subjects wore wristbands with the acronym WWGD (What Would Grandma/Grandpa Do?) written on them. Hokey, sure -- but effective. Placing a reminder of your goal where you'll see it day in and day out (a photo of your dream retirement house by your bed, for example) could have a similar effect.
Friday, September 3, 2010
7 secrets to a richer retirement #2 Try to beat the other guy
Thanks to their natural competitiveness and normal, comparing yourself to others that you can increase the speed of your goals - just look at TV's The Biggest Loser.
This strategy has the potential defined in retirement planning. Preliminary studies suggest that people who see data showing how their peers are saving are more likely to participate in their company retirement plans and to put more money in.
Thanks in part to these findings, a financial services company ING has recently created a website that allows eligible people to some 401 (k) plans that manages to compare their progress against their colleagues.
So far over 20% of people who have spent time with the tool you have made a positive change, and adherence to the plan or raise the percentage of salary to contribute, says Ashley Agard, head of research at the company's retirement.
Your coworkers can be powerful in another way too: they can put pressure on you to accomplish your goals. strategies called compromise, in which people publicly announce their intention to reach a target, generally are effective for those wishing to lose weight or stop smoking.
Now researchers are looking at how well they work to help increase savings. In 2008, Yale professors Ian Ayres and Dean Karlan StickK.com launched a free site that allows users to make a commitment to public or private, to virtually any type of goal.
To increase the pressure even more, users can bet money on the outcome. Researchers need more data to show how well the approach works commitments related to retirement, but early results are encouraging.
Now put these findings into action:
Benchmark
You can get INGcompareme.com, a public Web site managed by ING. There you compare your financial situation - anonymously and free - with about 140,000 others who have the same age, income, and other details.
The level of savings to fall short? Move! You're way ahead? Great, but just because you're hitting your colleagues do not necessarily mean that you will achieve your goals, warns Jack VanDerhei, research director of the Research Institute of Employee Benefits.
Make a commitment contract
You could do anything to tell some friends about your goal of saving and ask for your support - perhaps meeting once a month - to make a bet on the audience you will reach a specific level of savings for a certain period of time . You can pass through its promise of social media like Facebook or Twitter.
This strategy has the potential defined in retirement planning. Preliminary studies suggest that people who see data showing how their peers are saving are more likely to participate in their company retirement plans and to put more money in.
Thanks in part to these findings, a financial services company ING has recently created a website that allows eligible people to some 401 (k) plans that manages to compare their progress against their colleagues.
So far over 20% of people who have spent time with the tool you have made a positive change, and adherence to the plan or raise the percentage of salary to contribute, says Ashley Agard, head of research at the company's retirement.
Your coworkers can be powerful in another way too: they can put pressure on you to accomplish your goals. strategies called compromise, in which people publicly announce their intention to reach a target, generally are effective for those wishing to lose weight or stop smoking.
Now researchers are looking at how well they work to help increase savings. In 2008, Yale professors Ian Ayres and Dean Karlan StickK.com launched a free site that allows users to make a commitment to public or private, to virtually any type of goal.
To increase the pressure even more, users can bet money on the outcome. Researchers need more data to show how well the approach works commitments related to retirement, but early results are encouraging.
Now put these findings into action:
Benchmark
You can get INGcompareme.com, a public Web site managed by ING. There you compare your financial situation - anonymously and free - with about 140,000 others who have the same age, income, and other details.
The level of savings to fall short? Move! You're way ahead? Great, but just because you're hitting your colleagues do not necessarily mean that you will achieve your goals, warns Jack VanDerhei, research director of the Research Institute of Employee Benefits.
Make a commitment contract
You could do anything to tell some friends about your goal of saving and ask for your support - perhaps meeting once a month - to make a bet on the audience you will reach a specific level of savings for a certain period of time . You can pass through its promise of social media like Facebook or Twitter.
Wednesday, September 1, 2010
7 secrets to a richer retirement #1 Get a good picture of the future you
You must imagine that when you're retired, you will be fine as you are now - perhaps with a new fondness for early-bird specials and shows welfare PBS. But studies show that the present-day you do not really identify with that person a great future.
In fact, "the mind creates neural patterns similar to those created when you think about a stranger," says Northwestern University researcher Ersner-Hershfield Hal. This disconnect means that you're reluctant to trade rewards overnight rewards - the greatest obstacle to saving for retirement.
Behavioral scientists wondered: could create a better image of his old self help you better focus on their long-term goals? Researchers from Stanford University, which recently tested the question.
They put two groups of university students in virtual reality helmet and interact with them had real size versions of themselves. (Each student shares a bedroom with your avatar, which reflects a person's movements.)
A group of students found themselves at their current age, the other old saw transformed to appear 70 years old. Then the researchers asked the students how to save for retirement. Those in the latter group, said it would save twice as much on average as the others.
Experts are now building online tools to help you make such views. Example: Ersner-Hershfield and his colleagues are testing software that changes your photo as you move a slider to select different levels of savings.
If you choose a low savings rate, your current photo will be happy (I can spend more now), but the oldest will look sad (my nest egg is shrinking!). So far they have found that people who see older versions, more sad if you choose to save 6.75% of salary, on average, versus 5.2%.
Now put these findings into action:
Write it down
While you wait for this slider to a hit on the internet, making a low-tech exercise. Imagine the future of retirement you want - house by the lake? annual trips to Italy? sleep without worries? - In as much detail as possible. Then write down how you feel about that future. "Not only think, but the act of writing that helps you focus your thoughts and act," said Alessandro Previtero Ivey School of the University of Western Ontario.
Think Grandpa or Nana
"The grandfather of her sex with whom you most closely identified with a proxy can be great for your own future," says Ersner-Hershfield. Call it the mind can lead people to budget better and save more, researchers at Northwestern found.
In fact, "the mind creates neural patterns similar to those created when you think about a stranger," says Northwestern University researcher Ersner-Hershfield Hal. This disconnect means that you're reluctant to trade rewards overnight rewards - the greatest obstacle to saving for retirement.
Behavioral scientists wondered: could create a better image of his old self help you better focus on their long-term goals? Researchers from Stanford University, which recently tested the question.
They put two groups of university students in virtual reality helmet and interact with them had real size versions of themselves. (Each student shares a bedroom with your avatar, which reflects a person's movements.)
A group of students found themselves at their current age, the other old saw transformed to appear 70 years old. Then the researchers asked the students how to save for retirement. Those in the latter group, said it would save twice as much on average as the others.
Experts are now building online tools to help you make such views. Example: Ersner-Hershfield and his colleagues are testing software that changes your photo as you move a slider to select different levels of savings.
If you choose a low savings rate, your current photo will be happy (I can spend more now), but the oldest will look sad (my nest egg is shrinking!). So far they have found that people who see older versions, more sad if you choose to save 6.75% of salary, on average, versus 5.2%.
Now put these findings into action:
Write it down
While you wait for this slider to a hit on the internet, making a low-tech exercise. Imagine the future of retirement you want - house by the lake? annual trips to Italy? sleep without worries? - In as much detail as possible. Then write down how you feel about that future. "Not only think, but the act of writing that helps you focus your thoughts and act," said Alessandro Previtero Ivey School of the University of Western Ontario.
Think Grandpa or Nana
"The grandfather of her sex with whom you most closely identified with a proxy can be great for your own future," says Ersner-Hershfield. Call it the mind can lead people to budget better and save more, researchers at Northwestern found.
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