Diane Garnick

Mental Accounting is an important tool enabling us to make countless decisions each day. We code, categorize and evaluate our expenses using a system that we typically develop with our first paycheck. We routinely allocate some portion of our money to many buckets, and often overcommit ourselves. 25% to housing, 25% to food, 25% to loans, and of course, another 50% to entertainment. We don't necessarily make the best decisions, but if we make a mistake we have time on our side. Mental Accounting in Retirement involves a key change in mindset. Time is no longer on our side and (hopefully) our level of wealth is higher. Rather than allocate some funds to many buckets we propose fully funding one bucket before moving on to the next. This framework offers transparency into the age old question of how much guaranteed lifetime income each household needs while simultaneously offering savers insight into which goals they are on track to meet.

Many people save for retirement through their employer, who in turn applies gender-neutral saving rates, investment choices, and spending strategies in retirement. Intuitively this creates a sense of fairness, but this intuition masks the reality that many women face. Lifetime earnings and spending in retirement are anything but average for women. Consequently, the challenges women face are arguably greater than those confronted by men.

Loss aversion is a term in behavioral economics that refers to an individual’s strong preference to avoid losses over receiving equivalent gains. In other words, clients experience much more “pain” from losing on investments than pleasure from gaining. Studies have shown if a person loses $100, they “feel” like they’ve lost $200. For retirees, the pain is even worse because they have less time to recoup the losses. In this presentation, Diane Garnick will show how investment managers can help clients avoid the feeling of loss aversion by aligning clients’ budgeting process and monitoring of investment results with their long-term goals and thereby framing investment and spending conversations in a more positive light. Economically, there is no difference in the financial results, but these techniques can make a big difference in the client’s decision-making process and in the way they feel—happier!