Secret #4: Think in bite-size pieces

By Penelope Wang, senior writer


Use a retirement checklist each year. For one tailored to your age group, try ours.

Your 401(k) plan has likely trained you to think about building a single lump sum. But even savvy investors tend to overestimate how long such a sum will last.

When you look at a dollar figure, explains Princeton psychology professor Eldar Shafir, you're inclined to focus on its nominal value rather than on its total purchasing power, which will be eroded by inflation.

Experts call this phenomenon "the money illusion." And they've come up with a technique to correct it, known as reframing. Instead of focusing on the total sum, focus on the monthly income that the sum will create during your retirement years.

"People understand how much money they need each month, so it makes the saving process more relevant," says UCLA behavioral finance professor Shlomo Benartzi.

The idea is catching on. Financial services firm Putnam, for example, recently redesigned the website and statements for the 401(k) plans it administers to prominently display monthly income projections rather than total balances.

Put these findings into action:

Run the numbers. Estimate your monthly retirement income by using the calculator at troweprice.com. Compare that amount with what you'd like to spend. Falling short? Ramp up saving, cut spending, or postpone retirement (or all three).

Tweak your investment mix. Inflation, tame now, could increase dramatically over the years, warns Marilyn Dimitroff, a financial adviser in Bloomfield Hills, Mich. One way to limit the damage is to increase the amount of money you keep in dividend-paying stocks.

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