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Taking a Fresh Mental Approach to Investing for Retirement
Mental buckets of money. It sounds like an odd idea at first, but when you consider all the investments contained in savings and retirement portfolios, thinking in terms of “buckets of money” can actually help deconstruct a complex situation into something more manageable when strategically investing for retirement.
During our working years, we look forward to that paycheck that comes every two weeks or once a month. We plan around that check; taking into account our rent or mortgage, food, clothes, entertainment and savings. Even if our investment accounts are plentiful, when it comes to retirement, we need to mentally adjust to the fact that the regular check is no longer coming in. Call it “mental accounting.”
Morningstar recently published an article on the subject of mental accounting, where Michael Kitces, director of wealth management for Pinnacle Advisory Group, touched on the fact that there are different ways to sort and separate the different “buckets” of money. It’s essentially the way people categorize their money and how they think about their assets and income sources. Some researchers have narrowed these categories down into three main buckets: current income (paychecks), current assets (money used for current needs), and the future bucket for everything else, including retirement accounts.
What’s interesting, as the article explains, is that as humans we have feelings that often don’t line up with logic, or what is actually happening. Take, for instance, the fact that British researchers found when they looked at people’s happiness, the happiest were the ones with a comfortable amount of money in the first bucket, regardless of what was in the third bucket.
The goal for those people is to have cash on hand rather than savings for the future. Investing for retirement requires a different mindset when it comes to that third bucket. Interestingly, people with plenty of money in their retirement accounts will often stress in retirement because they don’t have that regular paycheck coming in to fill the first bucket. This is why it’s important to do the mental accounting.
Financial advisors will often focus heavily on investing in the retirement bucket, taking much of the importance off the money their clients have in a checking account. However, to appease that need to have a constant influx of cash to the checking account, advisors might recommend an annuity. Interestingly, the source quoted in Morningstar said less than one percent of people actually follow through with this advice.
One of the reasons people don’t adopt the annuity method is because if they do, they don’t really have the opportunity to improve their lifestyle from where it is right now, as it removes a lot of the flexibility of other investment accounts.
At Family Investment Center, we’re experts at helping people understand what they need to reach their goals. Investing for retirement, in all its complexities, is an important topic that deserves the attention of people who make it their life’s work. Contact us today and let’s start some mental accounting that will make you comfortable with your position today and in the future.