Given the choice between $5 today or $10 in six months, research shows many people would take the $5 鈥� forgoing a 100% return in the future.
Some people often decide to avoid current sacrifices that could pay larger dividends down the road. For example, they may save less for retirement to hold on to more of their paychecks, even if it means forgoing free money offered by their employer from a 401(k) match. Similarly, they may forgo spending money now on an annuity that could provide guaranteed income for life.
Steep discounting of the future in retirement planning
The tendency to steeply discount future time periods relative to the present is typically referred to as 鈥減resent bias.鈥� Put another way, people tend to attach far greater value to consumption in the present or near-term compared to the future. This tendency may result from the mistaken belief that future emotions will not be as strong as current emotions. In other words, people may think: Having less future income isn't ideal, but it won't bother me that much.
One way to help your clients overcome this bias is by encouraging them to picture the future. Try helping them strengthen their emotional bonds to their retirement-aged selves by using a narrative that helps draw them into their future.
Consider this sample narrative for Sarah, now 55. After retiring, she wants to visit Paris and plans to keep running half marathons as long as she can. At her current age, she could about 20 or more years in retirement.
If Sarah doesn't want to outlive her retirement savings, she should make sure there's enough money to last at least another 20 years. Adding an annuity to her retirement portfolio is one way to help. Unlike other retirement savings vehicles, annuities provide clients insurance against the risk of outliving their money after they retire.
When you tailor narratives to help your clients imagine the future, you may want to include:
Average life expectancy 鈥� and the potential of living to advanced ages such as 90, 100 and beyond 鈥� for both your client and his or her spouse.
The possibility of illness or other factors that may require a significant portion of a retirement nest egg.
Dreams and goals for retirement including hobbies, passions, travel, family, volunteering 鈥� perhaps even a second career.
Steep discounting of the future is just one of 10 behavior biases that can create roadblocks to smarter financial decision making. For more insight, 麻豆传媒 commissioned two experts in judgment and decision making at the UCLA Anderson School of Management to review these 10 biases which revealed these common behavioral tendencies and solutions to help overcome them.
Read more of their findings and explore other tools in our Understanding Consumer Behaviors Toolkit for resources you can use to help clients overcome barriers to sound financial decision making.
Insights on 麻豆传媒 Connect. Tips, tools and resources to grow your business by helping clients retire with confidence.
