Registered Rep: Your book looks at retirement planning issues from the perspective of behavioral finance. Why?
Gregory Salsbury: The most damaging errors investors make are psychologically driven. Over the past 10 years, Americans have engaged in spending behaviors that would now be considered exotic by any rational measure: multiple cell phones, daily cups of gourmet coffee. On a separate scale, millions of Boomers thought no amount of money spent on remodeling or upgrading a home was too much, because they were “investing.”
The financial meltdown drastically changed expectations about how and when people will be able to retire, as well as the kind of lifestyle they will be able to achieve. A significant part of the battle for investors will be revising their expectations to be more realistic.
From the adviser's standpoint, managing the emotions of investors has become just as important as managing the investments themselves. Even the best investment advice is irrelevant if the client won't follow it.
RR: Of the behavioral finance biases that you explore in the book, which are the most destructive, and why?
GS: Viewing retirement as an isolated event is probably the most damaging, because it causes people to put off saving or preparing for retirement until they are in the “zone,” just a few years before retiring. Another bias is the psychological distance we create between ourselves and our money when we use cash proxies. When we pay with a check, credit card or hotel room number, we buffer ourselves from how much we're actually spending. This type of behavior can be very destructive, because it makes it difficult to recognize the long-term impact of our short-term spending habits.
RR: What surprised you the most in your research for the book?
GS: There is a strong tendency for people to view retirement as a problem someone else will solve for them. One of my favorite findings is a 2008 Consumer Reports article that said that 59 percent of Americans surveyed expected to receive a pension check, yet only 41 percent could identify a pension to which they were entitled.
