Reasonable people can be illogical when it comes to saving and spending, says Dr. Marina Rain, PhD in psychology and manager of behavioural economics at Sun Life. “We often make irrational decisions that defy what traditional economic models predict, namely that our decision-making maximizes financial benefit.”

The emerging science of behavioural economics is shedding light on the errors people commonly make around money, including their workplace retirement plans. Going from accumulation and earning income to decumulation and drawing a retirement income isn’t just a financial transition; it’s a highly emotional one. Many emotions get in the way of sound choices.

Dr. Rain helps design retirement products and accompanying information that enable plan members to make better choices.

1. Default bias

Our brains are wired to seek easy choices to expend less energy, Dr. Rain says. “Most people go with the flow.”

That’s one reason we tend to stick with the same choices for breakfast or replace a worn-out pair of jeans with the same familiar brand. Those are low-stakes decisions. Not all are. Default behaviour means carrying on as before, even when circumstances should dictate a change.

The current default or status quo for many Canadians is to not save for retirement. Consider setting up an automatic deposit to your Choices plan, so saving can become a passive action.

2. Perceived hassle costs

We perceive complex activities as time-consuming and a hassle. Planning for retirement is filled with unknowns and lots of moving parts.

“As soon as we get a whiff of perceived effort, we’re less likely to pursue it,” Dr. Rain explains.

Breaking down retirement planning into small steps and simple language can counter the complexity. Not sure how to start? We can help! Speak to a Sun Life Financial Services Consultant1

3. Hyperbolic discounting

People value short-term rewards over long-term ones, even when the latter offer greater benefits. The desire for instant gratification is one reason why saving for retirement can take a back seat to, say, splurging on this year’s winter holiday.
That’s called hyperbolic discounting. Studies show that people would rather get $50 now than $100 next year. This discounting effect does not just pertain to money; it also affects how we perceive our future well-being, Dr. Rain says. “On a neurological level, brain activity when talking about our future selves looks very much like brain activity when talking about strangers.”

It’s important to start talking about your goals and dreams and imagining your future self-achieving them. “It creates a stronger emotional connection and a sense of responsibility – our future selves depend on our present actions,” Dr. Rain says.

4. Choice overload

People may say they want more options, but they often feel overwhelmed by them. “That translates to avoidance. Our minds overload, and most of us walk away without making a decision,”  Dr. Rain says.

5. Loss aversion

Psychologically, saving for tomorrow can feel like losing money today. The perceived “loss” can loom larger than the actual gain. Such loss aversion is often even more profound at retirement, when individuals are reluctant to decumulate – to “lose” assets they’ve been accumulating for decades.

6. The endowment effect

People overvalue assets they own, Dr. Rain says. “So when we have spent many years accumulating savings, at retirement it feels like a treasure we don’t want to let go of.”

Sun Life can help you see how your finances can support new daily rituals, along with bigger goals such as extensive travel. That realization can offer a better “sense of well-being and control over retirement,” Dr. Rain says, and make you more comfortable with this transition and the asset decumulation that inevitably comes with it.

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1Financial Services Consultants are registered as Financial Security Advisors in Quebec