Today, we’re going to talk about a mindset shift that needs to take place for retirees to enjoy and utilize their assets in retirement.

A Behavior-Based Retirement Approach

We’ve mentioned before that the 4Buckets system is built on behavior based principles – what we know about humans and investors, and the psychology that is innate in us. One of these principles that we’ve come to understand is called mental accounting.

What is Mental Accounting?

Mental Accounting is the idea that we segment our assets and our money into different buckets. That’s actually the reason why we use the buckets visuals and framework for our own retirement income system.

How Mental Accounting Occurs

So, we segment money and to use a few examples, let’s say I have a bucket of money for everyday expenses, a bucket of money for longer term expenses and needs that might come up or emergency funds. Or finally, let’s say there is a bucket for my long term retirement savings money that I will use later on in retirement. We naturally segment assets in this way. Mental accounting can be helpful, but it can also be hurtful. And we’re going to talk about how it tends to hurt retirees, when it comes to using and enjoying their assets for retirement.

Dissociation – Another Investor Behavior

If you think about retirement savings, a retiree and investor has spent so long putting this money away for their later life use. Typically, retirees have spent years and decades putting money away to eventually use once they’re ready to retire. What often happens as they put this money away, they begin to distance themselves from these assets and they create this sort of disassociation.

I can’t tell you the number of times that I’ve talked to everyday investors particularly in periods of volatility, and they will make the comment “Ethan, yeah, I know there’s some bad things going on in the markets right now. But I tend not to look at my accounts anyway. I take an approach where I don’t really look at that money. I know it’s for retirement, it’s for a long way off so I don’t really pay attention to it.”

That can be helpful particularly in periods of volatility, but it speaks to a mental accounting issue that begins to expose itself as retirees are ready to retire.

That money, as we understand, is meant to be spent, enjoyed and used in retirement, but because of this disassociation that has taken place and solidified in our behavior over the years, it becomes very difficult to then think about using that money for retirement income enjoyment.

So one key shift that retirees have to undergo particularly as they’re adopting the 4Buckets is thinking about how to use those assets for retirement income.

Retirees that don’t undergo this shift and this change in mindset will continue to look at these assets as only for later use when they’re absolutely needed. Oftentimes, retirees will convince themselves that they don’t really need a lifestyle adjustment, or there’s no need for them to enjoy anymore from their hard- earned savings. Because of this disassociation, it has been built up in their minds that this account really is never going to be used anyway. Particularly if they have a solid financial profile around it – they have little to no debt, they have a decent income cushion, and lifestyle is good enough. It’s hard to think about how we could use these assets in a more efficient way.

The Purpose of Retirement Savings

So in order for the 4Buckets to really take effect and to be useful, we have to think about how to use these assets ultimately for the purpose that they’ve been saved for and not look at it as something that’s going to deplete accounts or create scarcity. It’s a mindset shift towards abundance and utilization. As we use this 4Buckets system we’re able to begin looking at how we can put money to work in these different buckets for your utilization and enjoyment, but to also give flexibility to a retirement income plan.

Flexibility with your Retirement Income

That flexibility can come in the form of increased lifestyle as I’ve mentioned. It could come in the form of charitable giving, or legacy gifting throughout your lifetime, or it can be just for bigger purchases or enjoyment in retirement. But the 4Buckets system creates this flexibility and it all happens because of this shift of looking at assets to be used and spent for the purpose of retirement – the very purpose they’ve been saved.

So that’s what we’re talking about today, mental accounting, how it can be helpful, how it can be hurtful, and particularly for retirees, how to break through that mental accounting to look at assets in a way that can be better spent and enjoyed. Please continue to immerse yourself in the 4Buckets system and how it can benefit you and your retirement.