Posts Tagged ‘Impact Of Inflation’
Important new research — Talking to Seniors About Volatility
Wednesday, June 2nd, 2010
Earlier this month, new research was released on how to talk to seniors about their investments.
Titled “Behavioural finance and the post-retirement crisis” and sponsored by Allianz Insurance, this report compiles findings on how older investors perceive risk and make financial decisions .
Ten top psychologists, consumer behaviour experts and behavioural economists contributed to this report. Here’s how US advisor site Horsesmouth summarized some of the suggestions on how to frame conversations with seniors around risk and investing.
Hyperaversion to loss:
Be very conscious of the sensitivity to loss. In general, investors experience the pain of a loss twice as strongly as the benefit of a gain. For retirees, however, the pain of a loss is five times stronger than the equivalent gain.
Desire for control: Given their fear, you’d expect retirees to opt for protection and guarantees — but studies show the reverse is true. Many retirees shy away from products with guarantees because they don’t want to give up control.
The safety of “monthly income” When presented as providing income, 70% of investors over 50 chose an annuity. Only 21% chose the exact same annuity when positioned as an investment solution with monthly returns for life.
The impact of inflation Unless helped to think this through, there is a tendency for many seniors to focus on the nominal amounts they’ll be receiving and to ignore the impact of inflation.
Getting the math You need to be sure that your conversations are at a level clients can understand. Research shows that math ability starts declining at age 53; by 80, almost half of seniors have difficulty making sound financial decisions.
Here’s a link to the full research report
And here’s a checklist from the report on having effective conversations around retirement income planning:
| Checklist | Inspired by the Work of Professor… |
| Is the retirement income strategy framed in terms of the monthly income a retiree will receive? | Brown on Framing |
| Are the implications of today’s financial decisions vividly presented so employees see how their lives will be affected? | Goldstein on Vividness |
| Is the strategy appropriate for retirees who are hyper-sensitive to losses? | Johnson on Hyper Loss Aversion |
| Can retirement income decisions be made before the onset of cognitive impairment? Are the number and complexity of choices manageable for older individuals? | Laibson on Cognitive Impairment 2 |
| Does the retirement income strategy offer multiple accounts to facilitate different goals, such as paying the rent or spending money on vacations? | Loewenstein on Tangible Mental Accounts |
| Are employees, carried by inertia, assigned to a customized default that is appropriate to their situation? | Madrian on Inertia |
| Does the language used to describe the retirement income strategy make it easy to evaluate its features? | Payne on Evaluability |
| Does it encourage individuals to make active choices? | Previtero on Active Decision-Making |
| Does the retirement income strategy provide some inflation protection? | Shafir on the Money Illusion |
| Will it be perceived as fair by most retirees? | Shu on Fairness |
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Tags: Allianz, Allianz Insurance, Annuity, Consumer Behaviour, Conversations, Dol, Economists, Guarantees, Impact Of Inflation, Investment Solution, Math Ability, Older Investors, Psychologists, Retirement Crisis, Retirement Income, Rfi Response, Seniors, Sound Financial Decisions, Tendency, Volatility
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