How to conquer your fears—and plan for a bright future in retirement.
Over the course of recent decades, we’ve seen a seismic shift in the nature of retirement. People are living longer. On average, a 65-year-old woman has 23 years to live; a 65-year-old man 20 years.1 And those years are often healthy and active ones. “In less than a century, we nearly doubled life expectancy,” says psychologist Laura Carstensen, director of Stanford University’s Center on Longevity. (Read a Q&A with Carstensen: “Envision your future realistically.”) “That is a stunning, stunning change. Now, that’s good, but it’s also challenging because there are no real cultural guideposts—and that creates anxiety.”
The new-normal retirement is not your father’s retirement. For most people, there will be no one day when work stops and retirement begins, but rather a continuum of less work and more leisure—or volunteer work. Nor will there be a gold watch and a pension plan. Only 30% of Americans can count on a traditional defined benefit pension, according to the Employment Benefit Research Institute.2 The rest will have to rely on a combination of Social Security and their retirement savings. And the responsibility for managing a variety of imponderables—from how long you’ll live to what the markets and your portfolio will do—falls squarely on you.
Beyond the “misery myth”
Taking control of your finances during this important turn in life’s road is daunting enough, but the way we engage emotionally with that transition further complicates the process. One of the biggest hurdles to overcome, says Carstensen, is a phenomenon she calls the “misery myth.” It turns out that many of us have a deep-seated, rather irrational fear of old age. Either we can’t fathom what our lives will be like, or we imagine ourselves very old, frail, and lonely—even though modern medicine is keeping many people vital and active well into their 70s and 80s. As a result of this mis-imagining, Carstensen says, we tend to either not plan or plan too conservatively. “Not planning is the single biggest mistake people make,” she says.
The solution is to engage with your future self as early as possible, says Carstensen. Researchers at Stanford’s Center on Longevity emulated this experience by putting students in a virtual reality lab where they could meet avatars that looked like them at their current and their older ages. Afterward the researchers asked the students questions about retirement planning. The results were arresting: Those who engaged with their older avatar selves planned to save twice as much for retirement as those who avoided them.
As people approach or transition into retirement, another common hurdle emerges. Psychologists call it loss aversion. “Over the years, as money has gone into your retirement account, you’ve hopefully made a point of not touching it,” says Eric Gold, a behavioral economist who studies the psychology of financial decision making at the Fidelity Center for Applied Technology. “But when you retire, all of a sudden you need to write a check out of that account. You wouldn’t think that this would be a problem, but it is. Spending your retirement savings isn’t an easy thing to do. People fear the unknown and they fear loss. It can make them feel anxious.”
Imagine your future
To succeed in the transition from work to retirement, it’s critical to imagine your future life as realistically as possible. What is it you really want to do? Perhaps it’s travel, or moving to a warmer clime or closer to your grandchildren. Perhaps you dream of a second career. Whatever it is, give yourself the time to envision it, to own it. Once that future self begins to take shape in your mind’s eye, the planning process becomes easier, maybe even fun. After all, it’s your chance to take control and realize your dreams for life’s next chapter.
Once you can imagine that future, it’s easier to begin the planning process, which can help counter our natural fears of the unknown. And remember, it is a process, and one that will evolve with your goals over the course of your retirement. The key is taking the first step. “Set up an appointment with a financial professional, and tell yourself: 'I’m not going to leave that session until I have a discussion and come up with a plan,'" advises Carstensen. “Once you start that process, I think the odds of finishing it will go up really dramatically.”
Having a plan can also help you cope with loss aversion by letting you benchmark where you stand as you move through retirement. “People need guideposts,” says Carstensen. “If you have a plan that lays out where your accounts should be when you hit 70, 80, and 90, you can know if you’re on target, and not in a losing position. I think that’s very useful, both financially and emotionally.”
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Where noted, the views and opinions presented above reflect the opinions of Laura Carstensen, as of January 5, 2011. These opinions do not necessarily represent the views of Fidelity or any other person in the Fidelity organization and are subject to change at any time based upon market or other conditions. Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund.
1. Based on the Annuity 2000 Mortality Table, Society of Actuaries. Assumes a person is in good health.
2. Based on March 11, 2011, survey of participation in benefits over time, among all employees at medium and large private establishments. Source: Employment Benefit Research Institute.
3. Guaranteed lifetime income is subject to the claims-paying ability of the issuing insurance company.
4. Investing in a variable annuity involves risk of loss. Investment returns, contract value, and, for variable income annuities, payment amounts are not guaranteed and will fluctuate.
5. Fidelity Income Strategy Evaluator is an educational tool.
6. Fidelity Retirement Income Planner is an educational tool.
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