A Surprisingly Powerful Motivator to Plan for Retirement

Instead of focusing on such negative aspects of retirement planning as running out of money or protecting against risks, he wanted his clients to see examples of people who were having the time of their lives. His intuition was that by framing retirement as an aspirational life stage, clients would be more driven to plan for the future.

As it turns out, my research shows that he was right, even as they face inevitable speed bumps along the way.

The Science of Optimism

In a 1990 study, psychologist Martin Seligman and his co-authors played a trick on a group of college swimmers. After completing a practice competition, the swimmers were given a time that was a few seconds slower than their actual performance and were given an opportunity to swim a second time trial.

Seligman and his team had given each athlete a test for dispositional optimism, and the optimistic swimmers performed significantly better in the second time trial. One of the optimists was Matt Biondi, who failed to win his first two races in the 1988 Olympics but rebounded to claim five consecutive gold medals.

Why are optimists better at surmounting setbacks? First, they tend to see failure as temporary. If I lose 20% of my nest egg in a market crash, things will get back to normal and I’ll eventually recover. A pessimist will tend to believe that failures are permanent.

Pessimists also tend to personalize failure. If they don’t swim fast enough, it is because they just don’t have the talent. If they don’t reach a goal of saving $1 million by age 60, it’s because they just don’t have the discipline. Optimists believe that they’ll get there soon enough and will have enough by the time they retire.

Optimists also believe that if they didn’t swim fast enough, it is probably because of a specific factor that they can eliminate or overcome. The pool was too cold, I didn’t do enough stretching, I just wasn’t focused. Pessimists tend to believe that the failure is pervasive, reflecting their own general inability to reach goals.

Clients can be categorized as optimists or pessimists during an initial conversation. When asked about past financial setbacks, pessimists will tend to say that they’re just not good at managing money or that they believe that markets are stacked against them. Optimists will reframe failures as temporary setbacks and will point out specific mistakes that they plan not to repeat.

After receiving a diagnosis of heart disease, optimists are more likely to believe that by eating better and exercising they’ll be able to live a longer and healthier life. A pessimist will believe that the heart attack was an insurmountable catastrophe. It’s no use going to the gym or avoiding bacon. As a result, optimists are 10.9% more likely to reach 85.

It’s easy to see that optimists might also be better equipped to follow a financial plan or to even recognize the need to see a financial professional.

My father grew up in war-torn Eastern Europe in an environment where focusing on the worst possible outcome helped him survive. It’s also one of the reasons why he blamed himself for trusting a financial advisor who suggested he shift cash into stocks before the 1987 market crash, believed that his mistake had ruined his retirement plans, and why he fired the advisor and locked in his losses.

Optimism and Retirement Planning

While creating questions for a recent consumer survey funded by the Granum Center for Economic Security at The American College, I worked with David Stewart, a guru of healthy aging and founder of Ageist and Super Age, on ways to better understand the relationship between health and retirement finance. Stewart suggested that I add a question on general optimism.

As an economist, I didn’t expect that optimism would have much of an impact. I was dead wrong. Optimists are 67% more likely to have estimated how much they need to save for retirement, 75% more likely to currently save at least 10% of their income for retirement, 57% more likely to prefer at least a 60% stock allocation and 118% more likely to believe that they are financially prepared to live to 100.

Why are optimists so much better prepared financially for retirement? First, they believe that they will live longer. Forty-one percent of optimists indicate they devoted a “significant” amount of effort to their health compared with 12% of non-optimists, while 74% of optimists feel highly positive about life in their 80s compared with 43% of non-optimists. And 48% of optimists believe that they will still be able to travel at 95 compared with 22% of non-optimists.

It’s not surprising, then, that optimists believe that they need to be financially prepared to fund a retirement lifestyle that lasts longer and is more expensive.

We also asked whether respondents would be willing to buy income from their retirement savings by giving them a tradeoff that reflects the cost of an income annuity at 65 — buying $500 of monthly income for $80,000 of savings. Optimists were 53% more likely to indicate that they would buy at least $1,000 of monthly income than non-optimists.

While it might seem that pessimists would be more likely to want protection against a worst-case scenario, optimists are more likely to believe that they’ll be the ones who benefit from a product that has greater value to those who live into their late 80s and 90s. In addition, lifetime income insurance allows retirees to enjoy themselves without the fear that by spending freely in their 70s they’ll risk outliving their savings in their 90s.

Implications for Planning

Helping clients view retirement as a positive life stage is more likely to motivate savings than negative messaging that focuses on avoiding a disaster. Reframing market volatility is another opportunity to help clients manage negative emotions. Instead of personalizing a loss as a mistake, advisors can help clients anticipate future losses as simply something that markets do.

When markets fall, maintaining an optimistic mindset (“you’re still on track to meet your retirement goals,” “this is a great opportunity to buy stocks at a discount”) can help clients manage risk and stay the course.

Some clients will naturally be more pessimistic than others. These clients will be more likely to catastrophize when markets fall, to attribute bad luck to their own failings (including hiring an advisor), or to believe that no amount of planning is going to allow them to meet their financial goals.

By recognizing these tendencies, advisors can anticipate a greater need for risk coaching and using behavioral strategies that help pessimists overcome unexpected setbacks.