We’re now seeing the first generation of retirees who have spent decades saving in 401(k) plans and other defined contribution plans. Maintaining a disciplined approach to save and invest for such a long period requires overcoming human tendencies. Behavioral economics teaches us that automatic features in retirement plans help savers begin investing for their future, but emotions are still involved in accumulating large nest eggs over time.
For many, watching retirement balances grow 20% or more during some years became exciting and motivating. Once retired however, transitioning from a saving to a spending mindset is challenging psychologically. Seeing one’s hard-earned savings continuously diminish due to withdrawals can induce anxiety.
Mental accounting provides a solution. By dedicating a portion of savings to generate reliable monthly income, retirees gain comfort spending without drawing down their other account(s). Investing this “income fund” conservatively allows automatic transfers to a checking account without oversight. Period certain income annuities purchased without traditional commissions built in are one way to do this.
The remaining savings stay invested, allowing retirees to still experience market gains – an important psychological factor after decades of participation. By separating accounts to be utilized for different purposes, mental accounting helps address the cognitive dissonance of spending down savings accumulated over a lifetime.
Isn’t the point of decades of sacrifice to ultimately enjoy the fruits of our labor? Mental accounting can give retirees both financial security and peace of mind to do just that.
Decoding the Successful Retirement Journey: Vol.3, No.1
