Time to boost your retirement readiness
Start by getting comfortable with personal finance jargon
Saving for retirement isn’t easy, especially given the cost of basic living expenses and debt payments.
But it’s even harder when you consider that most people don’t have positive financial role models and consider finance topics too taboo to discuss openly, according to a recent Bank of America Merrill Lynch study. And if all that weren’t enough, the study, Finances in Retirement: New Challenges, New Solutions, also notes financial decisions are the most second-guessed of any major life decision, and 65% of Americans say the language of personal finances is confusing and not user-friendly.
So what can be done to combat those challenges?
Experts offer the following:
GET SMART
Americans are most likely to second-guess decisions related to personal finance (36%) — far more than work (18%), health (15%) or their home or living situation (8%), the study found.
What to do? For one, accept second-guessing as a fact of life.
“There is nothing inherently wrong with second-guessing your financial decisions,” said Brad Klontz, founder of the Financial Psychology Institute and an associate professor of practice at Creighton University’s Heider College of Business. “In fact, overconfidence in your financial decisions has actually been associated with worse financial outcomes.”
Second, learn as much as possible about money.
“It all comes down to getting educated about finances,” said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America Merrill Lynch.
Her advice: Read personal finance articles; identify advisers who can provide guidance, including your employer’s HR department; and connect with friends, families and others who can share their insights. Another resource: Bank of America partnered with the Khan Academy to create Better Money Habits.
MONEY ISN’T A TABOO TOPIC
Americans are seven times more likely to say talking about personal finances is taboo than to say it can be discussed openly, according to the study. What’s more, only 11% feel comfortable discussing their personal finances with others.
What to do? Learn the benefits of talking about money.
“For example, for siblings, it’s important to be proactive in case they will need to support mom and/or dad later down the road — whether physically or financially,” Sabbia said. “It can also be a great opportunity to teach younger generations lessons learned about how grandparents or parents accomplished their goals.”
FINANCIAL ROLE MODEL
Half of age 50-plus pre-retirees say they do not have a positive role model when it comes to financial planning, according to the study.
“We can’t challenge our thinking around money or learn other strategies until we are willing to break the taboo and ask for help,” Klontz said. Others agreed. “Above all, finding a positive role model starts with being willing to openly discuss financial situations, as well as being comfortable discussing where you may need support and guidance,” Sabbia said.
Where might you find such a person? “A financial role model can be several people and can be found in surprising places,” she said. “For example, while parents can provide a supportive gut check on purchasing a home or retirement planning, a colleague or friend can provide insights on day-to-day savings.”
Look especially for someone who is closer to reaching their financial goals than you are yours.
“Interview them; ask them for advice, strategies and suggestions,” Klontz said. “Become a student of financial success.”
Also, if you’re uncomfortable broaching a subject with a family member or friend, look for other types of role models.
“Employers are a powerful and important resource in empowering people to save for retirement,” Sabbia said.
LESS-CONFUSING LANGUAGE
Alpha, Beta and Sharpe ratios are words advisers use when building an investment portfolio for clients. But those words can make an investor’s eyes glaze over. What to do?
“The jargon in finance can be quite confusing, but the basics are very simple,” Klontz said. “Get clear on your goals, and then find a fiduciary financial adviser to help you design and execute a plan.”
Make sure, too, that your adviser uses analogies to make financial words less confusing, said Carol Craigie, managing partner and coach with Fiscal Fitness Clubs of America: “If we in the industry used common analogies, people would follow along much better.”
“Overconfidence in your financial decisions has actually been associated with worse financial outcomes.”
CLOSE SAVINGS GAP
According to the study, there’s a gap between a pre-retiree’s intention to save for retirement and actually saving.
Given that, Sabbia said pre-retirees ought to focus on three areas: Identify where can you be more proactive. Examine what you spend your money on and where there are opportunities to cut costs. And acknowledge that not everything goes to plan.
“It’s OK to be flexible as long as you’re keeping an eye on your long-term goals and how you can get there,” she said.
Brad Klontz, founder of the Financial Psychology Institute