Journal of Financial Planning: August 2021
Every client deserves the proper care and attention needed to meet their goals, but one group in particular that needs diligent planning is those who are intending to retire early. The financial independence/retire early (FIRE) movement has been gaining traction. Their retirement needs to be carefully planned to ensure that they have enough to last for their extended retirement. Small mistakes now can compound into big future issues. FIRE clients have a complicated balancing act to pull off in that they need to tame their propensity to spend money now instead of properly delaying it for future satisfaction, while simultaneously making sure their finances are flexible enough in the future to accommodate shifts in their values as they age. FIRE clients need to approach their present bias as well as their projection bias with care so their retirement doesn’t burn them in the end.
Present Bias
Anyone preparing for retirement needs to get used to delaying immediate gratification for future benefits. But our brains just aren’t wired like that. Spending can be a hard habit to break, and many young FIRE clients might still be too focused on what is happening here and now, not what they will need 30, 40, or 50 years from now. It can be helpful to have a defined plan for what happens with clients’ paychecks so they don’t fall into temptation. Make sure that they are setting enough money aside to achieve their long-term goals.
Projection Bias
On the other side of the coin, you have to make sure that your clients have a flexible enough plan to accommodate changes. A lot of people think they will be the same person in a few decades, but we all change over time, and our values, wishes, and plans do as well. If you have a client with a retirement plan that doesn’t allow for any modification, your client may find themself stuck on a path that they created 40 years ago that doesn’t quite fit them anymore.
P.A. Singh went into detail in their article for Barron’s: “These Biases Can Burn Your Early-Retirement Plans. Here’s How to Extinguish Them.” The gist is that clients need to build rules into their lives and paychecks so they can set enough aside, but they also must incorporate flexibility because people do grow and change. It’s a hard line to walk, but by creating a buffer, you can help your clients stay on track while enabling them to readjust their plans if they find their values have shifted over the years.
