Insights categories - Retirement

How to make investing for retirement feel less like a sacrifice

With all the financial demands of present-day life, it can be difficult to stay focused on investing for our longer-term financial goals. Balancing the friction that exists between our present and future wants and needs is key, but how can we go about this? Thandi Skade examines how “temptation-bundling” and psychologically reframing how we identify with our future selves can help us make better decisions and foster habits which promote improved investment outcomes.

Temptation-bundling is the idea of combining two particular types of activities: one that is beneficial, but that you often put off actioning because it’s not much fun, and one you enjoy doing, but that is not the most productive use of your time or resources. It is a term coined by behaviour researcher and Wharton School of the University of Pennsylvania professor Katherine Milkman, who argues that we are more likely to change our behaviour and form good and long-lasting habits when we are immediately rewarded for completing an action or task that we perceive to be a sacrifice.

In her 2014 study, Milkman set out to determine whether coupling the act of working out with a reward or temptation would improve exercise activity among study participants. A cohort of students were tempted with the promise of accessing the next chapter of an addictive, “must-read” audiobook, but the catch was that they could only listen to the book while working out at the gym. The other group of students was not offered a reward for exercising. The study results showed a significant increase in exercise activity among the participants who were incentivised.

The group of students who received no reward for attending the gym, but who did so in any event, drew on internal willpower to keep them motivated and on track to achieve their fitness goals. The other group, like many of us, required extra motivation to get it done.

Easing the trade-off dilemma 

Temptation-bundling can be a powerful tool to generate willpower, which could ultimately be harnessed to alleviate some of the psychological pain that we associate with the things we perceive to be a sacrifice. Investing for retirement is a good case in point.

Most of us accept that we need to make provision for a future income during our working years to afford ourselves the opportunity to retire later on in life. Yet simply understanding the why does little to ease the psychological tension that arises from having to make trade-offs today for the sake of tomorrow.

Dr. Hal Hershfield, associate professor of marketing, behavioural decision-making and psychology at the UCLA Anderson School of Management, contends that this is because our brains are wired to prioritise our present self over our future self. Our brains also tend to view our present and future selves as two different people, which makes a sacrifice like investing for retirement difficult to rationalise. This disconnect between the two versions of the self is the root cause of the pain we feel.

Using rewards to create smart investment habits

The value of temptation-bundling lies in its ability to be applied as a behaviour change technique. By linking a reward to a difficult task, what you are really doing is reframing your perception of a task into something you can look forward to, instead of something you'd rather avoid.

Take meeting with a financial adviser as an example. For some investors, their annual or biannual check-ins with their financial adviser can be an anxiety-inducing exercise. Therefore, instead of delaying this beneficial activity, why not consider making the engagement less formal by meeting at a restaurant or your favourite leisure spot (the reward) to plan for your financial future (the task that “ought to” be done).

The key to effectively applying temptation-bundling to achieving long-term financial goals is finding a way to include rewards in the process so that it becomes an instantly gratifying experience and a foundation from which good habits can be formed.

The more we can connect our present selves with our future selves and goals, the more likely it is that we will align our present-day behaviours … with those goals

Bridging the divide

There are several ways we can begin to bridge the gap between our present and future selves. The first is critical and involves creating a vivid image in our mind of what our future self looks like. Consider things like the physical appearance, needs, goals and desires of your future self, and the kind of life you want to live in the future.

The act of visualising our future self enables us to start building an emotional connection and identifying with this “stranger”. The more we can connect our present selves with our future selves and goals, the more likely it is that we will align our present-day behaviours and decision-making processes with those goals. 

Hershfield suggests that another way to strengthen the emotional relationship with our future self is by writing a letter from our future to our current self. In changing our natural pattern of time travel by going to the future and working backwards, we are forced to step into the shoes of the individual we may become and view things from “their” perspective. 

Reframing perceptions

If we truly want to succeed in changing our behaviour and attitudes towards long-term investing, we need to psychologically reframe the idea of saving into something that minimises the perceived pain associated with not succumbing to our desire to spend everything on ourselves now.

For instance, it is naturally overwhelming to think of the large amount we will ultimately need to see us through retirement, but if we rather focus on a monthly amount we can afford, and commit to a regular debit order that escalates annually, it suddenly feels more manageable. Being confronted with a smaller, more palatable figure makes it psychologically easier to commit to making the sacrifices required to benefit our future selves.

It is typically less painful to tackle a new goal by starting small. This could mean supplementing your pension fund benefit provided by your employer with monthly contributions to a retirement annuity or tax-free investment, or setting up a monthly debit order to a unit trust – suitable for most of your investment goals. Starting with a small contribution and gradually increasing it over time can make it easier to commit to automatic, annual debit order increases.

Beyond these behavioural interventions, consider seeking the services of an independent financial adviser who can help you overcome biases and encourage you to remain committed to your financial goals.

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