7 Deadly Sins of Retirement Planning – #3 Getting Emotional about the Money.

Some of us tend to be overwhelmed by money and finances while others, on the other hand, are overconfident. Both emotions can be harmful to your short and long term financial situation if they are allowed to dominate the way you approach your money affairs.

Being overwhelmed by financial planning in general and investments in particular often leads to a state of financial paralysis leaving you stuck in inappropriate investments that are not ever going to meet all your financial needs. Being overconfident can cause short term financial losses where, for instance, based on belief in your ability, you decide to embark upon a certain investment strategy because you believe that you are able to time the market by buying when the market is down and selling when it is up.

Behaviour Gap

A 2015 study by Dalbar in the United States of America (A Quantitative Analysis Investor Behavior) of all the equity funds in America found that in 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.

The biggest reason for this discrepancy appears to have been the emotions of fear and greed, along with herd instinct, that lead to irrational investment decisions. The difference between market returns and investor returns is often called the “behaviour gap.”

Being aware of this phenomenon will allow you to avoid destroying potential returns by refraining from falling into the pattern of moving your investments when the market is fluctuating.

But what if you are consistently plagued by emotional discomfort and experiencing sleepless nights caused by concerns with your financial situation and the fluctuations in your investment values?

The key to solving this uncomfortable quandary is:

(a) the taking of decisive action and establishing what solutions are available to provide for your particular circumstances and

(b) having your personal financial risk tolerance psychometrically assessed against the composition of your investment portfolio, your short and long term financial needs and objectives.

Both these avenues are available by talking with a professional financial professional who will be able to provide you with a large degree of peace of mind by reviewing your situation and providing suitable recommendations.

Subsidizing the lifestyle & debts of others

Retirees are often seen as an “informal bank” by family and friends seeking soft loans and financial assistance. Many a well devised retirement plan has been irreparably harmed by the compassion of a parent or grand-parent who has provided a loan at no interest or at an interest rate that is below available investment rates to assist children or grand-children with their debts or their (sometimes extravagant) lifestyle.

I do not believe that these types of loans should be regarded as being totally ruled out and taboo but, if they are to be provided, the lender should not be prejudiced by his or her compassion. The short and long term financial impact on the of these kinds of loans should:

be properly assessed and calculated with reference to the retiree lenders financial situation. Strong consideration should be given to documentation evidencing the loan (acknowledgement of debt) as well as making reference to the repayment or not of the loan in the last will and testament of the retiree.

Decisions relating to money and finance are often always made in emotional circumstances but great care should be exercised to ensure that the demonstration of your emotion does not destroy your financial well-being or encourage the poor savings habits of others close to you. When in doubt, always consult a qualified financial planner, you will find that the fee you may be asked will be insignificant when viewed against the financial harm caused by uninformed actions.