Make sound investing decisions at any age



Look at loss logically

Retirees have a much higher degree of loss aversion than the overall population, according to research in 2007 by Eric Johnson, a Columbia University business professor.

Since they're relying on income from a nest egg, it's understandable retirees would seriously lament drops in the market.

But loss aversion also works against what retirees seek to attain -- enough money for a steady income through their lives, Johnson says. Many of today's retirees don't have a defined pension providing steady, lifelong income, he says.

Purchasing an annuity is one answer, since these allow one to pay an upfront amount for a guaranteed income over one's life. But retirees typically don't like handing over a sum of money. "They think of it as a loss," he says.

Perhaps purchasing an annuity or annuities over a space of time, rather than relinquishing a big sum all at once, would help retirees overcome the feeling they're handing away their nest egg, Johnson says.


Recognize risk as risky

Johnson's finding of the increased pain retirees feel at financial loss is also supported by other research, says Greg Samanez-Larkin, a post-doctoral fellow at Vanderbilt University who previously studied older adults and financial decision-making at the Stanford University Center on Longevity.

Studies show that when older people are stung by loss, they will often try to recoup their shortfall by taking risky bets, believing they will get a big return, Samanez-Larkin says.

While riskier investments offer the promise of bigger rewards than safer investments that pay a minimal yield, the probability the risky bet will also be a loser is great, Samanez-Larkin says.

He says simply being aware of this loss-aversion/risk-taking combination may help retirees avoid staking too much in a gamble.



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