Plan to retire happy: beyond financial decisions
Over the last 40 years, a new school of economics has challenged the way we think about financial decisions.
“Behavioural” economists have run many experiments to understand how humans make decisions in the real world, and have found many instances where people’s decisions deviate from what a rational person would be expected to do according to traditional economic theories.
These insights have been used by governments in UK, US and to some extent Australia to devise new ways of helping people make the best decisions for them, such as the US’s Save More Tomorrow program which tied increases in 401k contributions to your next pay rise.
This research is starting to filter in to mainstream economic thinking. And yet, my personal experience of financial planning (having tried to find one for myself) has been woeful.
The approaches used by the typical financial planner to to help you think about the future and your finances are very basic and unhelpful such as:-
“Your current super is like a Toyota Corolla. This option here is a V8 and this one over here is a Ferrari”
And on similar lines: “In retirement, do you want business class overseas travel and fancy restaurants, or do you want domestic travel and to eat in the RSL once a week?”
The way financial planners communicate to their clients does not build on the masses of economic and behavioral economic research to help them make good decisions about their future.
A part of existing research has looked into the psychology of money, and finds for example that we create more happiness by spending money on experiences than we do on material goods. And yet, most people are blissfully unaware of this. In fact, psychologist Dan Gilbert has specialized in happiness and in his book Stumbling on Happiness argues that there is a gap between what we think will make us happy and what actually makes us happy.
Connecting this with financial planning, there is an opportunity to broaden out your retirement conversation from purely covering finances and into “happiness planning” i.e. a multifaceted approach to help you lay down the foundations for a happy retirement including health, relationships, purpose, projects, travel, experiences – as well as money.
In summary, people find it hard to know what will make them happy in retirement, and so the discussions are just limited to finances, which is very uninspiring and one dimensional as money itself doesn’t make you happy.
I recently found an audio book called Retire Happy in my local library. It covers the 12 key decisions you need to make to have a happy retirement. This book makes key points about broadening your thinking beyond finances. Apart from this, there isn’t much out there to help you with what I call “happiness planning.” So next time you are seeing a financial planner, also think about key factors which will make you happier in retirement than money.
- Where will you live? Near relatives? Somewhere warmer than where you are now?
- Who will you hang out with when you don’t have co-workers to socialize with?
- What will you do to keep a sense of purpose in your life, e.g. part time work or volunteering?
- What can you do now to keep yourself fit and healthy and enjoy a long and active retirement?
- Can you have a mini retirement now, a year off, instead of saving all your retirement for when you’re 70?
- Can you cultivate more shared interests with your life partner so you don’t find yourself annoying each other when you’re home more?
Note that many of the above ideas don’t depend (at least directly) on how much money you have. So they aren’t going to be mentioned by your financial planner. Some retirement experts recommend starting to think about questions like these 5 years before you plan to retire so that you can test out new hobbies, try new locations to see if you like them and so on.
Is retirement wasted on 70 year olds?
In his influential book the 4 hour work week, Tim Ferriss advocates for mini-retirements – have a year off when you’re 30 or 40 and go and do something interesting like learn to salsa dance in Spain. It certainly sounds sensible to put a meaningful break into your 45+ year working life rather than go that whole journey with never more than 2 weeks off.
Don’t default to standard thinking on retirement
There are two ideas above on how to think differently about retirement. The key is not to just assume that retirement will start at 65 or 70, and that all you need is to put some money away each year into superannuation.
Plan to retire happy: written by Rob Pyne