The Psychology of Retirement Income

“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.”

This quote from Nassim Taleb sums up the psychology of retirement income.

Having worked for decades in salaried jobs a regular monthly income becomes an addiction.

This addiction makes us even work in jobs we do not particularly like.

That is because it offers the certainty of a regular income each month.

We carry over this emotion of certainty into our retirement, which drives the perception of retirement income.

We value certainty even more as we get older.

This is one of the main things that differentiates salaried workers from entrepreneurs.

The salaried person is addicted to predictability of a monthly salary.

There is nothing wrong per se in continuing with this behaviour.

You cannot change your psychology about the comfort of a regular income which has been decades in the making.

A monthly salary is just like the interest on a bank fixed deposit.

You can sleep well knowing that at the end of the month a fixed chunk of money will hit your bank account come rain or shine.

The psychology of retirement income involves replicating the safety and certainty of a monthly salary in your retirement.

What is the Psychology of Retirement Income

The psychology of retirement income is how we perceive the process of generating and receiving income streams to meet our financial needs in retirement.

It can generate a range of emotions including fear, anxiety, security, and confidence.

The fear stems from the risk of consuming your retirement nest egg too quickly.

The anxiety of outliving the retirement corpus you have painstakingly put together.

The security and confidence come from generating a retirement income that looks like your pre-retirement salaried life.

Why is the Psychology of Retirement Income Important

The psychology of retirement income dictates if you will overspend or underspend from your retirement corpus.

It influences if you will encounter old age poverty or end up as the richest person in the graveyard.

One of the most challenging issues in personal finance is to figure out the right size of your retirement corpus.

Using the 4% rule to decide the size of your retirement corpus is as much art as it is science.

Some get to their target retirement corpus and retire without a lot of retirement anxiety.

Some others on the other hand are never satisfied no matter the size of their retirement corpus.

It never seems enough.

It is easy for this group to fall prey to the one more year syndrome.

Money Mindset Shift in Retirement

Retirement requires you to switch from a saving to a spending mindset.

A transition from wealth accumulation to wealth distribution.

It is not as easy as simply flicking a switch. It requires mental strength and effort to make this gradual transition.

Having been a saver for decades influences your psychology about money.

A large section of retirees’ underspend in their retirement.

They continue saving money from retirement income streams instead of spending it.

As a result, they end up leaving huge inheritances.

If you end up in this category your legal heirs will surely end up smiling.

As the quip goes – If you do not travel first class in your retirement, someone else will.

At the other extreme lies a poorly designed retirement income strategy.

It may mean you overspend your retirement corpus in the early years of retirement and end up in old age poverty.

Even worse you may end up being financially dependent on others at the most vulnerable stage of your life.

Making a transition across the 3 wealth phases requires time and effort to change your perception about handling your money.

A well designed retirement income plan can avoid the possibility of overspending or underspending in your retirement.

Using Psychology to Plan Your Retirement Income

Now that you understand how the psychology of retirement income impacts our thinking, you can use it to your advantage to design your retirement income plan.

The psychological approach to retirement income planning involves replicating your retirement income streams to your pre-retirement life as far as possible.

During your employment years you got a fixed monthly salary that took care of your living expenses.

In addition, you had one-off bonuses that helped with big ticket discretionary spending.

Similarly, devising a retirement income strategy that generates a regular monthly income and some occasional lumpsum pay-outs provides psychological comfort.

Turning Your Retirement Corpus into Retirement Income

Converting your retirement corpus into a regular stream of income is the cornerstone of retirement income planning.

You will be much more comfortable spending the income that your retirement corpus generates.

It is much more psychologically difficult to spend the retirement corpus directly.

Research on retirement income shows that retirees are far more comfortable spending from income than assets.

Using this retirement income psychology, a major portion of your retirement corpus should be converted into a regular income stream.

The common post-retirement avenues for generating regular income include rental income, dividends, and interest payments.

In addition, you may have regular pay-outs from the National Pension Scheme.

Your employer may also have some specific pension plans to supplement your monthly income in retirement.

All these sources can be combined to make a regular monthly income stream for your retirement spending needs.

The rest of the retirement corpus can continue to grow.

This will help you boost your regular income in the future years to cope with inflation.

Avoid the Trap of Guaranteed Income Products

Do a simple online search for monthly retirement income.

You are flooded with search results from insurance companies pitching their guaranteed retirement income products.

The insurance and retirement planning industry understands the psychology of retirement income.

They know people love certainty.

People are even willing to buy financial products with poor financial returns if they hold the promise of “guaranteed income in retirement.”

There is indeed value in an annuity as a concept. But buying off the shelf products from the insurance companies is not the best option.

The typical reader of this early retirement blog is a DIY investor.

You can build your own regular retirement income.

Consider the use financial products that are better aligned with your interests.

You are much better off buying long term government bonds rather than a high-cost annuity product.

It can be combined with a portfolio of high-quality bond funds.

Final Word on Retirement Income Psychology

Beyond the simple math of retirement income, we are all living, breathing humans.

We experience emotions that can put us at odds with rational decision making.

Using income being generated from your retirement corpus is much easier to spend.

It is much more mentally difficult to directly consume your retirement corpus.

Understanding your emotions around retirement income is immensely helpful.

It helps you use the psychology of retirement income to convert your retirement corpus into streams of regular income.

That is turn will let you know spend more freely in retirement.

It will take away your worries about outliving your retirement corpus.