The other day, I was enjoying a game of golf with a friend who happens to be a long-time retirement plan advisor. As it often does, the conversation turned to retirement; specifically, where the key to a happy, comfortable retirement really lies.
My golf buddy's answer? It's probably not what you think.
My friend believes that the secret ingredient to a successful retirement lies in patience -- and the secret to patience lies in the ability to delay gratification, which, needless to say, isn't exactly a hard-wired human trait.
Instant Gratification, Marshmallows and Wealth Management Solutions
Most people don't seem to naturally gravitate toward practicing long-term gratification, especially when short-term gratification is within reach. Instead, it takes a great deal of willpower to put off until later what you can have right now -- and for about 70 percent of us, it's really, really difficult.
To explain this concept further, let's turn to a historical psychological study. In the late 1960s, Stanford psychologist Dr. Walter Mischel offered children some tasty marshmallows and other treats. He told the children that they could either eat one treat immediately, or wait -- treatless -- while he left the room, then get two marshmallows when he returned in a few minutes. The kids were also given the option of ringing a bell to summon him back if they just couldn't wait any longer, but they'd only get one treat.
Only 30 percent of the kids were able to wait and receive two treats -- in other words, to delay gratification. The other 70 percent chose to indulge in short-term gratification, ringing the bell and sacrificing the promise of two treats for the sugary, instant goodness of a single marshmallow.
What does this have to do with strategic wealth management and retirement planning? Probably everything.
Successful Financial Strategies Require Long-Term Thinking
When you consider planning for retirement -- and the disciplined focus on delayed gratification that it requires -- it's not hard to understand why so many Americans are so worried about retirement.
Of course, there's also the fact that preparing for a comfortable retirement is harder than ever. We're living longer, with most the average American living for another 20 years or so after hitting traditional retirement age of 65. That means that the money has to stretch even further, all while the costs of healthcare and housing increase, and pension plans fade away into a memory.
But back to marshmallows. This widespread inability to make sacrifices today for the promise of a better return in the future is known as temporal discounting. This common practice describes a very human tendency to discount the value of something in the future as compared to the value of something that's available in the present. Even though most people understand that saving for retirement is necessary in order to have a comfortable life in the future, instant gratification is just so much more appealing.
So what's the solution?
Tips to Overcome Temporal Discounting from Retirement Plan Advisors
Fortunately, you can take steps to overcome this common tendency. First, realize that the real reason you're not saving isn't because you don't understand the importance of saving. Rather, it's that pesky human tendency toward temporal discounting.
Take it out of your hands by automating the process and practicing some long-term thinking:
- Set up automatic contributions into your IRA and 401k accounts through your payroll
- When you get a salary increase, set your contributions up to automatically increase, as well
- When you're considering an impulse buy or a big purchase, give yourself some cooling off time; do you really need it? Reconsider before making the final decision
- Visualize the negative consequences of being in debt for years by painting an image in your mind
- Similarly, visualize yourself as an elderly person with no savings or income who's utterly dependent on others to get by
While it may be a bit more complicated than simply waiting a bit longer to eat your two marshmallows, it's possible to overcome your natural tendencies toward instant gratification and prepare for a happy, comfortable retirement -- even if it's in spite of yourself.