The Secret to Financial Planning in Your 50s: Understanding Value

4 - The Secret to Financial Planning in Your 50s Header ImageThere’s an old yarn that economists know the price of everything and the value of nothing. But they’re not the only ones: in a clever experiment, the behavioral economist Richard Thaler showed that most of us have trouble differentiating between the two.

This human quirk isn’t just an interesting puzzle for economists to ponder: it’s a real risk for investors and those looking for a better path towards retirement.

The price versus value paradox

Thaler asked people to imagine they were buying either a $15 calculator or a $125 leather jacket. In both cases, the person could save $5 if they were willing to drive 20 minutes away to another store.

So how many people would make the drive? The results might surprise you.

A full 68% of calculator buyers were willing to make the trip, but only 29% of the leather jacket purchasers thought it would be worth it. In both cases, shoppers faced the same cost-benefit equation: 20 minutes to save $5.

Why were those buying the more expensive product so much less likely to do it?

It turns out these kinds of decisions aren’t driven by the actual amount of money involved, but rather by the value of the “mental account” we’re working with. Compared to the relatively large “account”, a $125 purchase, $5 is nothing. But compared to the $15 calculator, $5 is a savings of 33%.

Isn’t that a good reason to save $5 in one case but not the other?

cloud-download

Retirement: Are You Ready? The 50+ Retirement Plan Guide

Relative price versus real value

Unfortunately, while you might relate to this logic intuitively, it’s not a very useful framework for decision-making. That’s because $5 is always worth $5. Whether you think it’s a lot of money or a little shouldn’t change based on what you happen to be buying in the moment.

Instead of allowing ourselves to be influenced by the relative cost of a product, service, or fee, it’s important to assess its value – on its own merits.

The best value may not always come with the lowest price4 - The Secret to Financial Planning in Your 50s Info Image

Thaler’s experiment didn’t ask the participants to account for other things, like the value of their time, the return policy at the store, or the trustworthiness of the retailer. But in making real purchase decisions, these are important considerations.

For example, we have a client, Nick, who is an avid outdoorsman. Hiking, mountaineering, scuba diving – you name it, he’s doing it. When talking about budgeting in a financial planning meeting, Nick’s advisor inquired about his hobbies. They sounded so exciting, but did they need to be so expensive?

Nick replied, yes, of course there are cheaper ways to be a mountaineer. But because of the importance of his hobby and the risks involved, he made the decision to only buy from knowledgeable retailers who offered lifetime guarantees and high quality equipment.

This gives Nick peace of mind in the great outdoors and the comfort that he has recourse should a particular piece of equipment not meet his expectations.

For Nick, the extra cost is well worth it.

The connection to retirement planning

 The same argument could be made when it comes to investment retirement planning. What is valuable? What cost is worth it? These are questions that you should be thinking through carefully – after all, it’s not a jacket, it’s your financial future.

The most important step is to assess the cost in light of the service, value, or quality you’ll be getting in return. In other words, consider what you’re getting for your money: is it the same across your options, or does one option offer more?

It comes down to this: we all have things that are important to us – whether it’s personal advice, dedicated service, lasting guidance, or a lifetime guarantee on your climbing equipment. The real key is to first find the value that meets your needs, and make your decisions from there.

Ready for action?

Making plans for retirement can seem complicated and overwhelming, but it doesn’t have to be. Check out our free guide to retirement planning in your 50s to learn about the steps you can to take today to help solidify your financial future. Download it today, and get started on the road to financial freedom!

cloud-download

Retirement: Are You Ready? The 50+ Retirement Plan Guide

Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

4 - The Secret to Estate Planning Infographic

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

Securities and advisory services offered through United Planners Financial Services, member FINRA, SIPC. Pasquale Vitucci, CA Insurance Lic. # 0758212, is an Endorsed Agent of Vitucci & Associates Insurance Services CA Insurance Lic. # 0I06319. Vitucci & Associates Insurance Services and United Planners are separate and unrelated companies.
This page contains links to third-party company websites. By selecting a link, you will be leaving our website and launching a new browser window. These links are provided for informational purposes only and should not be viewed as an endorsement, sponsorship, solicitation or other affiliation with respect to any third parties. We are not making any recommendations or providing any advice on securities in particular or investments in general. Neither Vitucci & Associates nor United Planners Financial Services have reviewed the content of, and are not responsible for, the information or the results of the third-party websites.
Further Reading

Mental Accounting Matters (Richard Thaler experiment): http://faculty.chicagobooth.edu/richard.thaler/research/pdf/mentalaccounting.pdf

  • 3 5 Ways to Improve Retirement Readiness in Your 50s Header Image5 Ways to Improve Retirement Readiness in Your 50’s
    You’re saving money, getting serious about financial planning, and monitoring your investment accounts. But retirement planning isn’t just about saving money: it’s about the habits and lifestyle you build ahead of your golden years. Read on for 5 ways that you can start building retirement readiness here and now – and none of them have to do with your portfolio.
  • 2 How to Prepare for a Rocky Start to Retirement Header ImageHow to Prepare for a Rocky Start to Retirement
    What happens when you have a great retirement plan – only to get caught off-guard with an early retirement? Our client Linda experienced exactly this scenario. Currently 61, Linda is single and has been in complete control of her finances since her divorce nearly 20 years ago. A client of ours for years, Linda was on track to retire at age 67 with her investment accounts, Social Security, and a deferred annuity to see her through the golden years. That is, until she was unexpectedly laid off at age 59 – and struggled to find a new job. Here’s what Linda did as we helped her navigate this challenging situation.
  • 1 Whats a Portfolio Stress Test Header ImageWhat’s a Retirement Stress Test, and Why Do I Need One?
    If you follow the financial news, you may have heard about annual “stress tests” at the major banks. These tests help determine whether banks have the financial stability to get through a major problem, like a market crash or economic downturn. It’s a worthwhile undertaking, but for the average person these tests might seem a little abstract. Oftentimes, banks will incorporate possibilities like a rising interest rates, a collapse in emerging markets, or an economic boom leading to higher inflation. You might even be falling asleep just thinking about it! But stress tests are useful for individuals, too – especially pre-retirees