Why saving for your future is so hard

Self-knowledge is difficult to attain. Understanding the you of 2030 is all but impossible. Yet you have to plan for the person you'll become.

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By Pat Regnier, Money Magazine assistant managing editor

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Pat Regnier's column "The Bottom line," appears monthly in Money Magazine. Email him at pregnier@moneymail.com

(Money Magazine) -- You salt away 10% of your pay into a retirement plan, but this "retirement" thing can feel pretty abstract. What will it be like? To judge by the pictures in personal-finance magazines (including Money), there will be a house by the water. And Adirondack chairs. And the occasional sea kayaking expedition.

Perhaps. But there will also be, well, an older person. An older person with your name and your Social Security number but maybe not so much of your hair. You'll have a lot in common with this later you but not everything. You'll have some different desires and different fears. And even where the present and the future you agree, that older person's feelings aren't that vivid to you now. It's easier and more enjoyable to think about sea kayaking. That's a bit of a problem for your financial planning.

What do you mean by you?

Psychologists, economists and legal scholars often speak of people as having multiple selves. This odd idea helps to explain a lot of our mistakes - we just don't always know what will make our future selves happy. In fact, we make predictable errors, says Carnegie Mellon University economist George Loewenstein, thanks in part to a mental habit called projection bias. We put too much weight on our current tastes when thinking about our future ones. "When we aren't feeling hungry, it's easy to go on an extreme diet," says Loewenstein. The next day, of course, sticking to grapefruit and black coffee is a lot tougher.

This is even harder when you're thinking decades down the road. Richard Posner, a judge and law professor, has written that aging changes us so dramatically that we should imagine different people "time-sharing" our bodies. And the earlier tenants often leave messes for the next one to clean up.

You've experienced this - just think of your teenage years. The cliché is "If I only knew then what I know now," but it's really more like "If I only knew then who I'd be now." For example, I was an indifferent student, but I take a lot more pleasure in learning as an adult. Life turned out better than slacker teenage Pat could have hoped. But I feel that I was shortchanged by the kid who didn't learn Spanish or finish Anna Karenina.

The new adventures of old you

Spin this forward to the retired you. Economist Teresa Ghilarducci has argued that retirement saving beyond Social Security should be mandatory, in part because our young selves can be so unsympathetic to our older selves' needs. (Loewenstein says the young may falsely imagine they'll be too miserable to enjoy the money.) But it's easy to see how even committed savers could miss the mark.

Lots of people set up stock-heavy portfolios and let them ride, confident that they are risk-tolerant investors. Will they feel that way if the market tanks near their 65th birthday? You may save less because you like your job and figure to keep going, ignoring the possibility that you won't have the same desire (or the health) to work at 67. When people do retire, they often prefer a lump-sum payout. But older retirees, one study shows, are happier if they have some guaranteed, lifetime annuity income.

When I started thinking about this, my first idea was that we should try to imagine being our later selves. Loewenstein warns that this probably won't work. Better, he says, to take a cool look at the facts. This cuts against some common advice. It suggests that instead of asking if you feel like an aggressive or conservative investor, you should focus on how long a 70% stock portfolio would last in a bear market. Assume that you may retire before 65, because many do. And consider an annuitized income, because the risk of outliving your money is real.

Imagine that a court put you in charge of the finances of an elderly uncle you don't know well. You'd set aside your own tastes and try to make prudent decisions for him. Do the same for you.

Need help with a financial dilemma? In an upcoming issue, Money magazine will be answering reader questions. Email money_letters@moneymail.com.

Have you found a way to pay for your child's college education without taking on too much debt? Did you choose a university based on its lower cost or loan programs, research scholarships, or just save up and pay in full? We want to hear from you. Send your stories to pwang@moneymail.com and you could be featured in an upcoming story.
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