Here's my second post that compares retirement planning by logic vs. emotion and explores a few concepts discussed in an excellent paper by Melissa Knoll entitled "Behavioral and Psychological Aspects of the Retirement Decision."
My prior post showed how Mr. Spock would overcome behavioral tendencies such as loss aversion and framing -- common mistakes in any decision-making process -- and would objectively analyze his financial resources to determine exactly when he could retire. Meanwhile, Homer would succumb to these common mistakes and would start his Social Security benefits as soon as possible so he could devote all his time to watching TV and eating donuts -- his two favorite pastimes.
Melissa's Knoll's recent paper explores the topic of decision-making even more, delving into how humans often make tradeoffs in their decision making. For instance, when deciding whether to start Social Security benefits as soon as possible or wait until they're older, people trying to choose might weigh the choice of more leisure time now and less money later vs. working longer now and having a larger retirement benefit later. This "tradeoff" decision-making style implies that potential retirees actively compare what their lives would be like under possible future scenarios -- they imagine how things would be if they retired now compared to how their lives would be if they continued working.
According to Knoll, there's a lot of evidence that shows that we tend to overestimate the intensity of our reactions to possible future events. That is, we imagine that an event will actually be better or worse than it actually turns out to be.
When considering the possibility of working longer, for instance, people often imagine that a few extra years will be worse than they actually turn out to be. That's because people tend to focus on the worst aspects of work -- such as feeling unappreciated or being bored -- and overlook the day-to-day positive elements, such as interacting positively with coworkers and feeling productive and helpful. This is an example of negativity bias: The theory is that people tend to put more emphasis on negative events than positive events. I can certainly confirm this from my own experience. If I experience one negative event during the day, it usually takes three to five positive events to overcome my negative feelings.
On the other hand, if people are focusing on the positive aspects of retiring, such as taking a cruise, they tend to do so without considering the negative aspects of retirement, such as day-to-day boredom, less interaction with friends, and restrictions caused by reduced income.
So what would Homer (making decisions using his emotional brain) and Mr. Spock (making decisions using his logical brain) do when it comes to retirement? It's easy to imagine Homer ignoring the negative side of retirement and focusing only on the positive. Can't you see him telling his boss to shove it and choosing to retire as soon as possible, spending his days drinking beer at Moe's bar and investing his retirement savings -- if there are any -- at the race-track? Mr. Spock, on the other hand, would certainly think long and hard about the negative aspects of retirement, such as boredom, and decide to apply his talents and skills to new projects that interest him in order to stay active and engaged.
Knoll discusses another human tendency to be aware of when thinking about retirement: Being overly influenced by events in the recent past or near future. For example, if you've had a recent unpleasant experience at work and you're eligible to retire, you might be thinking, "That's it! I'm outta here" and forget all of the more distant events that have made your work enjoyable. Your eagerness to leave your job will also keep you focused on events that are going to happen soon after you retire, such as taking an exotic vacation, but will have you overlooking events taking place in the more distant future, such as the possibility that you'll run out of money or that your spouse will receive reduced surviving spouse's Social Security benefits because you started taking your benefits too early.
One helpful way to make more accurate predictions regarding whether you should keep working or retire is to write down the events that might take place during a typical workweek or even keep a journal for a few weeks. How many events gave you satisfaction? How many made you feel frustrated or undervalued? When you were feeling frustrated, how long did it take to recover?
Similarly, you should imagine your life as a retiree, looking beyond events in the near future that might give you temporary enjoyment, such as a vacation. Try writing down some ideas about what might happen during every day of the week. Have you filled your days with worthwhile activities? Or are you bored because you have no hobbies or outside interests? These exercises can help you make more realistic predictions of what your life might be like if you continue working vs. retiring.
Here's the bottom line: When planning your retirement, think like Mr. Spock and spend some time analyzing your financial situation. Don't act like Homer and give in to your baser emotions! You'll thank yourself when you reach your 80s and 90s with enough money to continue buying donuts, beer, and all the other things you need to enjoy life.