At a glance
- Human brains are hardwired to prefer instant rewards over bigger benefits in the future, which makes it difficult to forgo spending now in favour of investing.
- Retirement seems so far off that even the most money-savvy people can struggle with the motivation to save and invest – but you can ‘trick’ your brain with techniques from behavioural psychology.
- Create a picture of your ‘future self’ – a visualisation that will make the ‘you’ in retirement feel as real as the ‘you’ today – and speak to your financial adviser about turning this into a plan.
There are few certainties in life, but one thing we can be sure of is that we are all getting older. While most people know that they need to save for retirement and that the state pension is too low to provide a comfortable lifestyle, many still don’t do enough.
Often this isn’t down to a lack of understanding or time. It’s because our brains are wired to prefer instant rewards rather than long-term, deferred benefits – and when it comes to money, this makes it hard to forgo spending now in order to save for the future.
Even committed investors and the most financially savvy people sometimes find that while they can overcome their urges to spend in favour of saving for near-term goals, the prospect of retirement feels so far off that they struggle to put aside as much as they could in their pensions.
How can psychology explain this?
In behavioural psychology this is called ‘hyperbolic discounting’, which simply means that when given the choice, humans have a tendency to prefer a small perk now rather than a larger one later. A simple experiment that illustrates this would be to offer people the choice of either £100 a month for a year or £1,400 in 12 months’ time. The majority would opt for the monthly payment – even when reminded that they’re giving up a chunk of money.
Hyperbolic discounting says that this preference for immediacy is enhanced when the bigger reward is pushed further away. The longer people expect to wait for the larger sum of money, the more irrational and impulsive they become and, increasingly, people opt for the smaller amount today. Psychologists call this ‘temporal myopia’, an inability to fully consider the future outcomes of choices.
Among the reasons for this is the instinct for fear that’s hardwired into humans – what if you accept the offer of a bigger amount in the distant future and it never materialises? In addition, there’s the fact that most people are juggling a number of immediate demands on their money. Combine these and it’s easy to see why most people prefer the security of cash in hand today over promises for tomorrow.
The power of visualisation
When it comes to retirement planning, there’s another dimension: people struggle to imagine themselves decades into the future, as ‘old’ people. This inability to empathise with our future selves makes it difficult for people to lock away money in pension accounts that cannot be accessed until the age of 55 at the earliest – even for those who are fully aware that tax relief makes pensions one of the most attractive ways to save and invest. (See our guide to pension tax relief here.)
One powerful method that can help in overcoming these barriers to reaching retirement goals is to use the visualisation techniques that elite sportspeople employ to boost their motivation. An athlete struggling with the monotony of their strict training regime and eating plan will picture themselves at a competition months or years in the future. By allowing their brain to ‘see’ their body in peak condition, to ‘hear’ the roar of their fans and ‘feel’ the triumph of achievement as they mount the podium to receive a gold medal, athletes get the boost they need to maintain their focus today and keep working towards their goals.
How to do it
Retirement savers should picture themselves at an older age and imagine what it feels like to be free from any unwanted burdens around work. Reflect on where you would like to live if money was no object – maybe you would divide your time between different homes or countries. Think about what hobbies or interests you would pursue if you had fewer demands on your time. Would you change career, start a business or volunteer for a cause? All of these are possible when you have a substantial retirement fund to support you.
Remember that the way people age and retire is changing, as we’re living longer and healthier lives, so the images you have in your head about ‘old age’ may be outdated for your generation. Allow yourself time to really sense what life could be like once you achieve your financial goals. Doing this regularly, and especially when your motivation is flagging, can be an effective way of getting into the mindset for financial success.
We can offer pension advice and help you stay motivated with saving and investing for retirement, just ask.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.