The Psychology of Planning for Your Retirement   Dec 22, 2011

Did you know that from the very first day you receive money, not at your job, but as a child the pocket money you receive, you have been an ‘investor’?

Think back to the first day you received pocket money.
You most likely spent it on food, movies and other entertainment, and travel.

How much of it did you save?
Not much, if you were like most children in school and college.
Most likely, you were more of a spender than a saver. You invested in instant gratification, as do most youngsters.

From this young age, your activities, your spending patterns, formed a habit. Your investment behavior started to get set. Your investor psychology began to solidify.

Then you got your first job and started to mingle in the workplace.
By this time, your spending (or saving as the case may be) habit is set.
At work, you interact with your colleagues, slowly you hear about people making investments in ELSS mutual funds, or in their PPF.
Your HR talks to you about EPF so you know about that too.
You glean investment facts haphazardly from your colleagues and without really verifying the data, make more investment decisions.

Things go on this way for the next few years.
Your focus is mainly on saving tax and then you start to think about your life goals.
You’re getting married, then having children, educating your children, somewhere along the line you buy a home by taking a home loan.

And so the expenses continue, and your saving, or spending, or investing habit continues as it did earlier. Your investments receive just enough of your attention for you to feel like you’re doing something useful about it.

And with each well-intentioned step you take along this path, your biggest goal of them all suffers. The wealth that you could have built, does not get built.

What we don’t realize is that the success of all our life goals, from buying a car, to our children’s educations, to going on a family world tour, to retiring young and retiring rich, depends on our investment behavior.

For the scope of this article, we’re going to focus on the impact of your regular behavior on only one life goal: your retirement. Let’s see how your investor behavior, your investor psychology, affects your retirement planning.

To start with, let’s look at some investor psychology trends and how they affect your retirement corpus.

  • Investor Behavioural Trait #1: Procrastination

    Nobody wants to deal with the big bad wolf. Everybody’s hoping that if we ignore him, he’ll get bored and stop stealing chickens. So we procrastinate when we should be looking for a solution.

    Procrastinating is bad for your Retirement. You lose out on time value of money and power of compounding both.

    Let’s look at the cost of not investing early:

    Mr. A is 25 and invests Rs. 5,000 per month. He is investing into equity mutual funds and will likely earn about 15% per annum over the next 25 years, until he turns 50.

    Mr. B is 35, and invests Rs. 15,000 per month. He is also investing into equity mutual funds and expects the same rate of return for the remaining 15 years, until he turns 50.

    Mr. A achieves a corpus of Rs. 1.62 crores.
    Mr. B achieves a corpus of Rs. 1 crore.

    The solution is simple. You want to be an investor as early as possible, even if the amount is small. You must save, invest, and save some more and invest some more, and in doing so, you will build up your wealth.
  • Investor Behavioural Trait #2: Overconfidence & Ignorance

    Don’t underestimate inflation.
    Don’t overestimate your ability to deal with financial goals ‘later’.
    Don’t underestimate the benefit of saving taxes.
    Don’t overestimate your health, as you get older, it will get weaker.

    These things might seem unrelated, but they all point towards one quality – your confidence, or overconfidence, as the case may be.

    Inflation will erode the real value of your wealth.
    Dealing with a financial goal now is easier than dealing with it later.
    Saving taxes will add to your retirement corpus in significant ways.
    Your health will flag as you age.

    If you knew how much you need to retire, you might not feel very confident of achieving that corpus. You would probably immediately realize the importance of getting started right away, and saving every buck. And once you realize the importance of saving every buck, you will realize the importance of dealing with goals immediately, saving taxes, and being adequately insured. Our Retirement Calculator is your first step in this journey of realization.
  • Investor Behavioural Trait #3: Constant Tracking & Monitoring

    Once you realize that you need to invest, and you identify the right amounts, the right schemes, the right asset allocation, and begin your investments, the one thing you must NOT do, is track your investments every day, or every week, or every fortnight.

    Know your time horizon. Before you make an investment decision, i.e. buy, or sell, ask yourself, why are you buying this mutual fund and why are you selling that one?
    There is only one right answer to these questions:
    You should invest because you are building a corpus for a particular goal like your child’s education or your retirement. You should redeem your investments because your goal has arrived.

    If you track your investments on a daily basis, your emotions will go on the same ride as the markets – up one day and down the next. Human beings aren’t built to handle this kind of emotional volatility. So invest in the right schemes, for the right amounts, for a particular goal, and monitor once a quarter or once in 6 months. If markets are crashing – excellent! Buy more – it’s cheaper now! Don’t follow the herd – eventually it might run off a cliff.
  • Investor Behavioural Trait #4: Investing Alone instead of as a Family

    No man is an island. We all have families, and our financial decisions will affect them. The best way to go about building a retirement plan is to first sit down with your spouse and figure out exactly what you’re spending now – you have to consider household expense inflation, medical expenses inflation, travel expense inflation, and the kind of lifestyle you want to maintain in your retired years. Will you do more charity work after you retire? Will you travel more? Will you both take up hobbies?

    Together, you both should decide when to retire. If family dynamics and complicated where finance is concerned, remember to use kind words and be patient and loving. Everything is possible if you know how. If you need an unbiased party, ask your financial planner to sit in on the discussions. After all, who knows more about every aspect of your financial life than you, your spouse and your financial planner.


The habits you built as a child dealing with money can be modified, tweaked and bettered. You can, right now, stop procrastinating, realize the cost of delay, and start planning for your retirement. Remember, follow the 4 simple guidelines outlined here, and call a financial planner to plan for your retirement today.

Add Comments

Dec 23, 2011

A plan for retirement will help to ensure that you will be able to continue living the lifestyle you want after you have completed your working years.

Dec 27, 2011

Good begining : It says "Well began is half done" ....
Foundation of investment is laid in early childhood experiences and stays lifelong. Worth a Read !!!

Feb 25, 2012

With the decline in the economy, every business has had to cut back. But when a business cuts back on employee benefits I think it really hurts employee morale and production. As a working American, I hope that businesses will find other ways to cut back rather than reducing health and profit sharing benefits.