People behave in mysterious ways, especially when dealing with such emotionally charged issues as saving for retirement. Not exactly news, but something to consider when guiding clients through the risks of market performance, living too long and inflation. How do you mitigate the client's own risky behavior?
According to LIMRA Vice President for Retirement Researcher Alison F. Salka, it's all in the presentation, or framing. Products or concepts that in one context produce a negative emotional reaction can be quite inviting when presented another way.
"Consider that most people seem comfortable with the idea that they can live on 70 or 80 percent of their pre-retirement income," said Salka. "People seem a lot less comfortable, however, when asked about their planned spending reduction of 20 or 30 percent."
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LIMRA research also found that describing an annuity as an investment that pays a specified return for life left most clients cold. They warmed up when it was presented as a monthly paycheck for life.
Behavioral science — the study of why savers and investors sometimes behave in counterintuitive and counterproductive ways — has been informing how advisors deal with clients for a while now. The concept of automatic enrollment grew out of the observed inertia most people experience when it comes to saving a portion of their income for some future event. By making inertia work the other way (they have to opt out rather than opt in) more people have been able to save for retirement.
Salka cites research that shows retirees are particularly averse to loss, not just loss in the value of their investments, but also loss of control over them. Paradoxically, products that offer a guaranteed income and protection are often viewed with skepticism because control is all with the provider rather than the investor.
"Consumers can be irrational," Salka concludes. "However, people tend to be irrational in some common, predictable ways. This 'predictable irrationality' lets us better identify where people go wrong and help steer them toward better retirement decisions."
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