The Magic of Personal Finance is that there is No Magic

I wanted to talk a little bit today about illusions and our brain. No doubt most of you are familiar with magic. We call falling in love with the right person magic. We think of good fortune as magical. Yet, magic is based on three key principles and these are best illustrated with the simplicity of a card trick.

Although I am not a magician I do know that every kind of magic hinges on the ability of the magician to create something your brain wants to believe. And this precarious attempt to fool you depends on you wanting to be fooled. In fact, every magic trick is based on this belief: that the magician can fool you. But noted magician Penn Julliette of Penn and Teller fame also is quick to point out that any sort of illusion, designed to fool the brain is a disaster waiting to happen. Surprisingly, attitude has everything to do with the success of any trick – not you attitude, but that of the magician.

Mr. Julliette explains that in a simple card trick, the key is for the magician to act as if he doesn’t care. He could care less whether or how much you shuffle the deck and his attitude portrays exactly that. Then, when you return the deck of newly shuffled cards to the magician, he or she then offers you a card, any card. You do and this also doesn’t matter. But where you put the card upon returning it after memorizing of course, it does.

Now the magician’s job isn’t finished. He or she does care where you put the card and uses any number of techniques to get the card back to the top of the deck. But your brain believes that it has controlled everything up until this point. In effect, the unwilling suspension of disbelief has taken over our thought processes. Even when the magician offers to have you re-shuffle the deck, you won’t.

Now I have been writing about the state of personal finance for over thirteen years. Which means I have spent a great deal of time with people who are looking to achieve the same financial success in their post-work life as they may have in their pre-retirement life. But our brains are working and I fear that we aren’t doing a very good job talking to those brains.

As financial educators, we are well aware of what the people we focus on do with the information we have. In fact, most of us find some sort of information, latch on to it and actually look for confirmation of that thought. In 2007, researchers at the University of California – San Diego found that once we expose ourselves to information, it becomes an acquired memory. Not permanent mind you. Your brain doesn’t work that way. Instead it seeks out information that permanently fixes it in our heads. This is what brain folks call spaced repetition. Given the right info your brain performs impressively. Given the wrong information, and your brain still performs impressively.

Another bit of research points to what is called retrieval. Seems your brain performs better if the memory you have stored there is pulled and examined. Each time we do, the memory gains some importance. We as financial people fail here as well. We do make those we deal with think about what they want and how they think it should be once they get it. But inevitably, we add to the problem by giving them something they hadn’t considered. The memory of what we thought we knew is still there. But now we have something else to remember.

The last problem we encounter is as financial educators is the act of dumbing down. We fail to do what some educators have found is the most important of functions: interleaving. We try to explain things in so simplistic a way that we actually confuse more than teach. We tend to piecemeal our lessons, a bit about debt here, something about insurance there and perhaps a little estate planning antidote thrown in for good measure. Yet we define them as parts of a whole instead of a whole. They are intertwined and we make the mistake of suggesting all too often that they are somehow pieces to be taken at their own worth, an approach that doesn’t seem to help according to the journal Applied Cognitive Psychology. Those we are hoping to help, according to this august publication would do better if we lumped it all together, somehow tying it up in a neat bundle of problems and issues instead of giving the whole process a linear feel. It can’t be helped in books, as as any editor or writer knows. One thing needs to lead to another.

And far too often, we break that linear explanation of money into something like this: hope, fear and confidence.

Unfortunately, hope for something better is dashed by the fear of what we don't know and ultimately, your confidence begins to wane. This is problematic for anyone who attempts to try and describe what they know, How do you parse the necessary information amongst the thousands of messages out there and make it meaningful across all readers?

Perhaps boiling it down, removing the illusions, forgetting the magic might work. Personal finance is no magic trick. It involves challenging what you know; not simply believing what you need to know. You need to save and invest and yet, even as you commit to those hopes, you are challenged by what you hear and this creates fear. Fear that perhaps you haven't done all you could do. Perhaps confidence stems from doing what you can with what you have to achieve what you are capable of. Lofty goal setting aside, you are the magician looking at the trick. Tell yourself what the magician tells you.

You are probably better off than you realized. You are probably capable of fixing the small things which in turn lead to the bigger solutions for the problem. Be the magician against the markets. All you need to know is how to your card on top.

Is it Management or Retirement Planning?

It seems you can't pick up a paper, read about it online or see on television these days without the conversation turning to the dire straights the economy is in. This gives us cause to worry because we know all too well what it's like to be close to retirement. But I have always been concerned with the phrase. Just saying it make the whole process seem like a carrot on a stick, always within sight; never quite reachable. Why does it have to be like that? is I there perhaps a better way to planning for retirement? Possibly the key is in the management.

From the minute you put your first dollar to work for you in 410(k) or an IRA, you were close to retirement. Age suggested you were closer but we soon learned that it wasn't so much a date on a calendar that determined the retirement scenario. It was the date plus the money you had invested.

Unfortunately, this is sort of backwards. The approach can be forgiven in part because we are constantly exposed to planning as the key to getting from that first dollar to that toes-in-the-sand-drink-in-your-hand place called retirement. Planning offers us some solace that we are doing something. What we find out too late is that "something" in more prone to failure than we had previously anticipated. So we back-off, give-up, resign ourselves, or worse, make the same mistakes again.

Why would we, knowing what failure tastes like continue to make the same mistakes? We are groomed to do what we have always thought was the right thing to do: plan. Fredrich Hayek, the Nobel prize winning economists suggested that you can't possibly know everything at once - there is simply too much data and it is happening too fast. Trying to collect in one place to make a decision is only asking for trouble. There is an African proverb that suggests only a fool test the water's depth with both feet. So why do we think we can jump into retirement using only one tool?

We are conditioned in our business dealings to think that we can control various aspects of the world around us, bending it to our will. But these are simply reactions to what has already passed. And that further conditions us to accept failing as long as, according to Francois Gadenne, CFA, who is the current co-founder, chairman and executive director of the Retirement Income Industry Association in Boston: "To succeed we must fail, early and often -- and cheaply."

Writing in a recent edition of AdvisorOne, Mr. Gadenne sought to reverse the planning of retirement by suggesting that it should be a management of funds. By building what he calls a funded floor, you are essentially unable to make big bets about an uncertain future. He blames the current state of retirement on the idea of central planning. Central planning becomes rationale on top of failed rationale and that is not based on what could happen but rather who is in charge when it did.

He writes: "Retirement income advisory processes should work like market prices rather than like central planning because, once we move beyond didactic examples, central planning cannot be smart enough or large enough or coercive enough to overcome the knowledge problem in the real world." In some ways, he seems to be deflecting the blame, something we are very comfortable doing when it comes to our money. Planners should merely advise and review that advice annually.

This seems to give advisors some distance between what you are doing and what you should be doing it. That chasm can become incredibly wide and because you are mostly conditioned to react to after-the-fact events, it is now you, not those who advise you, who are responsible for your failure to manage while trying to make a plan succeed.

Because retirement planning - or management - is often so far away and the people involved in the earliest stages of this process have probably drifted away, it is a wholly "you" process. You bring the mistakes that you have been conditioned to bring. When things get risky and when the risk costs too much, you take fewer of them because you know that they are less expensive. And because the retirement pundits also suggest that the earlier you start, the better opportunity you have to weather the downturns that await us, we accept them, regret them and learn to move on. And often repeat them.

Paul Petillo is the managing editor of BlueCollarDollar.com/Target2025.com