Retirement Security Means More Than Saving Early

Many Americans start retirement planning too late. But in her book, Joy Compass: How to Make Your Retirement the Treasure of Your Life, author Julia Valentine says that's only one of many pitfalls. Host Michel Martin talks to Valentine about securing your retirement.

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MICHEL MARTIN, HOST:

I'm Michel Martin and this is TELL ME MORE from NPR News. Coming up, do you think the term vegetarian feast is an oxymoron? Well, Bryant Terry is ready to convince you that vegetarian cooking can be savory, satisfying, even soulful. He'll talk about his new book, "The Inspired Vegan," in a few minutes.

But, first, we turn to matters of personal finance and it is no secret that the recession has put a dent in many Americans' savings, and many people might still have that idea of that picture postcard retirement, including days at the golf course or relaxing beside the pool or trips to far-off places.

According to Julia Valentine, author of the book, "Joy Compass: How to Make Your Retirement the Treasure of Your Life," if you plan now, you might still be able to salvage those dreams. And Julia Valentine is with us now.

Welcome. Thanks so much for joining us.

JULIA VALENTINE: Glad to be here, Michel.

MARTIN: I just want to mention that you spent a lot of years on Wall Street before you turned into kind of helping people manage their finances, and I just wanted to ask if you could just briefly tell us how you got interested in the idea of personal money management after you spent a lot of time, you know, helping companies create wealth.

VALENTINE: You know, I was surprised at how little people know - well educated people know - about managing their finances and things that were very, very easy to me - but I had an MBA, of course - were really a revelation to them, including my own family. And I saw some...

MARTIN: There was an experience in your family?

VALENTINE: Yeah.

MARTIN: If you don't mind telling us briefly...

VALENTINE: My grandparents retired at 55 and they were all set and then, unexpectedly, they invested in a money pyramid scheme and, for about three years, they were making 90 percent returns on their money and, on year four, you know, they actually lost everything. And the family said, no worries. We'll help you out. Don't stress out about it. But they couldn't. They were so involved in processing this experience that, eventually, my grandmother had two strokes and she was half-paralyzed for many years.

And it was a very traumatic event. It just, it made it personal for me. Let's put it this way.

MARTIN: And you have - a lot of your reporting suggests - and you've cited - you know, in fact, we on this program have also cited numerous studies that demonstrate that a lot of Americans, despite the fact that - you know, financial planning, financial advice has become something of a cottage industry - that many Americans don't have any idea of how much money they will need to retire, don't have a budget, don't have even a figure...

VALENTINE: Yes.

MARTIN: ...you know, in mind. Why do you think that is?

VALENTINE: One of the issues there is that psychology hasn't really found its way into financial affairs and what I mean by that is there are now studies that say there is such a thing as future self-continuity. What is that? It means that - can I imagine myself 30 years from today? And there is research being done, actually at NYU, one of my alma maters in New York, and psychology professors are saying that, if we're shown our own picture using simple aging software - and it shows you - this is me 30 years from today.

People who actually see this save more. They put away more money. Apparently, it's not a simple thing for us to connect with. Hello, my future self. You know, 30 or 40 or 50 years from today.

And what's really interesting is that now they're saying, let's take this to human resources departments. Let's take this and build it into financial tools and a psychologist I respect immensely - Dan Ariely - he essentially said there is a product design flaw in the way that we do financial tools.

So if you're using a retirement calculator, for example, it doesn't tell you how you're going to feel if you save $40,000, $400,000, $40 million. There's no emotional connection there and there's no ability to visualize what it's going to feel like if you're 89 and you don't have enough money to cover your monthly expenses.

MARTIN: We're talking with Julia Valentine. She's the author of the book, "Joy Compass: How to Make Your Retirement the Treasure of Your Life," and we're talking about some of the common mistakes that people make in planning for their futures.

Let's walk through some of those. You recently wrote a piece about six perennial pitfalls that people make and the first one is taking financial advice from friends and family over professionals. You said that people routinely take financial advice from people like their hairdressers and people who do their nails.

VALENTINE: They really do. They really do. Look, Facebook made an industry out of this. You know, you like something, you click on, I like this, and people go and buy it. We are designed - we're built this way. We take - we heavily weigh opinions of people we come across very often. It's a natural thing to do.

MARTIN: And yet, you know, it's interesting because we often hear about these schemes involving people like professional athletes who come into a lot of money, you know, suddenly and then, you know, lose it all. And we think, well, that's just them. And you're saying this is actually a fairly common problem.

VALENTINE: Oh, this is us. This is not them. This is us. It's not a bad idea to hear something from someone, but you need to be aware of two things. First of all, emotional dynamics are very, very different around family, around friends. It's more difficult for us to stand up and say, no, to them.

And, secondly, financial literacy. Look, people under-invest in financial research. We don't like to read the fine print. Who does? It's boring. It's tedious. It's, you know, it's something that people skip over and so, if you hear an idea, it might - I'm not saying it's a good idea or a bad idea. I'm saying do your research and be aware that there is an emotional dynamic involved.

MARTIN: Well, you have a couple of points around the whole idea of doing your research. You say another couple of common mistakes that people make are underestimating inflation, withdrawing too much money early on in retirement - and this might sound like a simple thing, but lacking a financial plan. Talk a little bit about that, if you would.

VALENTINE: A financial plan doesn't mean that you plan your life in 15-minute increments. So to all the people who tell me, I'm not a planner, the first thing that I ask them is, have you ever planned a vacation? Oh, yeah. Have you ever planned a wedding? Oh, I've planned five of them, you know. So don't tell me you're not a planner. Everyone is.

MARTIN: Let's talk about failing to adjust the asset allocation in your portfolio with time. Talk a little bit about that.

VALENTINE: Well, the appropriate asset allocation is going to depend not only on your risk preferences - how aggressive you are, how conservative you are. It's also going to depend on your timeframe. So as you are getting closer to retirement, the amount of time you have for your investments to rebound from a down cycle - and, of course, we live in a cyclical economy - is less.

So you need to continue looking at your asset allocation every year.

MARTIN: Every year?

VALENTINE: Every year. And a lot of people - you know, we can say five years, but I'm being conservative here because, for a lot of people who hear us, you know, they might be nearing retirement. So I'll say take a look at it every year. Make sure that you are where you want to be and quite a few people allocate their funds and then leave the 401K somewhere and just never look at it again. They just forget about it.

MARTIN: Julia Valentine is the author of "Joy Compass: How to Make Your Retirement the Treasure of Your Life." She often speaks and conducts seminars around this issue around the country and she was kind enough to join us from our bureau in New York.

Julia Valentine, thanks so much for speaking with us.

VALENTINE: Thank you, Michel. My pleasure.

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