By age forty, you should be at least half way through your working career. If you started saving at twenty, you may be two-thirds of the way and may even be focusing on the possibility of an early retirement. But for the sake of discussion, we�ll assume you haven�t even begun to save, that you probably have more than your fair share of debt, are living a life surrounded by family � both kids and parents.
And on top of all of that, you probably suffer from � big word alert! � cognitive dissonance.
Life as a Game show
Television game shows are real life tests of our human nature. In the case of Let's Make a Deal, Monty Hall presented challenges to contestants that tested their risk taking ability. What most of us didn't realize, even as we played along from the comfort of our homes was the behavioral economics problem that was being conducted in real time and with real prizes.
John Tierney, science writer at the New York Times explained what cognitive dissonance is, calling it the Monty Hall game.
Mr. Tierney described a test that was done at M.I.T. by Professor Dan Arley based on the show (which still can be caught on the Game Show Network). Given the choice of three doors, two of which had a goat behind it and one which had a car, the folks playing the game on TV could not determine their odds of winning once Mr. Hall, as he always did, revealed what was behind one of the doors.
Professor Arley, using his students in the experiment, found that they could not determine their chances either. With three doors and three choices, Monty knew we were unable to determine our odds. That made the game difficult to play with any success.
Once Monty opened a door with a goat behind it, he would then give the contestant the opportunity to switch between the two remaining doors.
The students believed that once one door was opened, their odds of having choosing the right door, the one with the car behind it improved. In fact, the opposite was true.
Making the Right Choices
By age forty, you have let this sort of cognitive dissonance get in the way of picking the right door for your own retirement planning. It is human nature and defies rationality and its okay.
If you were given three choices: pay the bills, begin saving for retirement, or rework our everyday finances so we could save more today, we all tend to take calculate our odds incorrectly and fail to make the right choice.
So how do we fix it? How do we make the right choice when we are faced with the day-to-day struggles of just keeping the checkbook balanced, the mortgage paid and the kids fed? It is simpler than you might think.
Here are four simple moves, that if you made them right now will not only get you on the right course, it will help you pick the right door every time.
First: March yourself in to your personnel office, human resource coordinator, or whomever is handling your company's 401(k) plan and sign up.
A 401(k) plan is a tax deferred, defined contribution plan that takes money from your paycheck before taxes are taken out. You determine how much is taken out each pay period, either as a percentage or as a fixed dollar amount. The money is often matched by an employer contribution � up to a certain amount � and is directed to a retirement plan that most commonly uses mutual funds to invest for your future.
Agree to put 5-10% away � I�ll tell you where at the link below � and never, ever, under any circumstances, touch it until you retire.
- What is a 401(k)?
- How much can I contribute?
- What is the a defined contribution plan?
- What is an index fund?
Second: If your kids are old enough, tell them where you sit financially. If they are too young to understand, make the commitment between you and your spouse/partner to stop the leaks in your budget. Every penny counts now, as it never has before. Saying it out loud helps.
Third: Consolidate your debt. This could be difficult. If you have damaged your credit score in any way � missed or were late on a payment for example � you may have difficulty getting a good interest rate on a loan that will tie all of your credit problems into one manageable account. Instead, enlist the services of a not-for-profit consumer credit counselor. They can help you get on a plan, talk to your creditors, and get you on the right track.
Fourth: Think about every choice you make, from this point on, in terms of how it will affect your retirement. Each financial decision will have a long-term effect on your retirement plan.
Are you fixing up the house so that you can retire there or do you plan to sell it someday for a smaller property or warmer climates?
Is your health good? (This is by far, one of the most overlooked pieces of your retirement plan. Making it to those later years in good health � well exercised, no smoking, etc., will save you untold dollars in medical costs).
Am I sacrificing my retirement for my children�s college? (With the importance of higher education on potential earning power growing each year, it is hard to turn selfish and say, "sorry, kids, my retirement is more important that the loans you might have to take for school" but if you are at square one, the hard questions need to be asked. And worse, they need to be answered.
All is not lost nor is it doom and gloom. But each passing day with too much debt, outsized pressures on your income and no retirement savings to speak of means your expectations for retirement will need to be lowered.
One last thought. This is an excellent time to begin to develop a second career. Something that you like doing that possibly could provide you a little income after you retire. Statistics are beginning to surface that Baby Boomers are not fully satisfied in retirement unless they have some sort of structure or focus. Developing this now and when you are in your early fifties, acts like a financial safety net as well. It is far more rewarding to work at something you love because you want to, not because you have to.