When It Comes to Retirement Planning, Mindset Matters

Advisors know this and so do smart investors: Personal habits often translate accordingly to the world of investing. It’s a big reason why behavioral finance is an increasingly credible, prominent field.

Behavioral finance is also broad and includes myriad applications, but if often seizes upon a simple theme: Human behavior can be a detriment when it comes to investing and personal finances, but it can also be altered for the better. Under any circumstances, that’s important, but how clients approach money is particularly crucial when it comes to retirement planning.

In the Retirement Mindset Matters report, Goldman Sachs Asset Management (GSAM) polled 5,261 U.S. workers and retirees, noting that there are four desirable traits regarding the right retirement mindset: high optimism, high future orientation, high financial literacy and a having a reward orientation (rather than a risk-orientation). Not surprisingly, the number of folks out there possessing all four qualities is low, indicating there’s wok to be done and that advisors remain critical in the retirement planning equation.

“Yet only 10% of working respondents exhibit all four ‘optimal’ traits, while 5% exhibit all four reciprocal or ‘suboptimal’ traits – low optimism, low future orientation, low financial literacy, and risk focus. The vast majority (85%) possess a blend of these traits and report mixed success in saving for retirement,” according to GSAM.

Why Those Traits Matter

On their own, high optimism, high future orientation, high financial literacy and a having a reward orientation are positives, but when combined, these characteristics can significantly enhance a client’s potential for better retirement outcomes.

As noted by GSAM, optimistic individuals are also likely to be more proactive – an obvious plus when it comes to retirement planning. That leads to into the future orientation component.

“Individuals with high future orientation tend to have good savings behavior and are typically more financially prepared for retirement. They are more likely to maintain emergency savings, prioritize retirement planning, and engage in proactive financial behaviors, such as retirement savings reviews,” notes GSAM.

Financial literacy is intertwined with the two factors noted above because investors that are at least somewhat financially literate are more likely to stay abreast, to some extent, of market goings on and periodically review retirement progress. Those are positives for advisors, too, because clients in that cohort are likely to be open to tactical strategies that can defend or improve retirement savings.

Regarding risk vs. reward orientation, folks in that group are also likely to be proactive and less stressed about their finances because they’re prioritizing risk avoidance.

“Individuals with a reward-orientation more often take proactive actions with their savings, such as setting up personalized financial plans, access financial help, prefer investment income in retirement, report less stress managing finances and have a higher level of savings,” adds GSAM.

Advisors, Personalization Matters

As noted above, a scant percentage of advisors and prospects have all of high optimism, high future orientation, high financial literacy and a reward orientation. Some may have a couple and some may have none. That’s confirmation that some personalization is needed.

Advisors will also find that in addition to personalization, facilitating improved behaviors, such as optimism and being proactive, can improve relationships with clients.

“By understanding behavioral tendencies, a sponsor may be able to more effectively personalize education and advice. Incorporating motivations and their impact on one’s preferences for products and services can help improve communicating offerings effectively and personalizing the retirement savings experience,” concludes GSAM.

Related: Believe It: Millionaire Clients Don’t View Themselves as Wealthy