A well-crafted early-retirement plan rests on detail—careful calculations, timelines, milestones, and savings plans to help you hit them. It can look great on paper, but in the years it takes to reach financial independence, and then enjoy early retirement, your plan can fall victim to a surprising foe: the human brain.
Behavioral biases can sabotage even the most carefully constructed plan, and the human brain isn’t wired for optimal financial planning. Present bias and projection bias are two behavioral biases that those who follow the financial independence/retire early, or FIRE, movement should understand so their plans don’t get knocked off track.
FIRE participants are a rare breed, says Massimiliano De Santis, a behavioral economist and certified financial planner at Desmo Wealth Advisors in Austin, Texas. They actively pursue delayed gratification to ensure they have enough savings and income to allow them to retire decades early.
Even so, De Santis sometimes sees present bias—the tendency to place a premium on near-term payoffs at the expense of the future—show up in his FIRE clients when it’s time to turn aggressive savings plans into actions. “Sometimes we make the plan, and then they wait—they don’t start saving,” he says. As much as they want to save, present bias makes spending now too enticing.
To override this tendency, De Santis suggests locking in financial decisions well before your paycheck arrives and months in advance of one-time payments like yearly bonuses.
“If you wait until June to talk to about a yearly July bonus, you’re more likely to have many ideas for how to spend it,” De Santis says. “So you make the decision in January when present bias causes less emotional attachment to the money.”
If the decision is specific and there’s longstanding accountability to a plan, De Santis says, investors will be more likely to go through with it when their money finally comes in.
Additionally, De Santis recommends FIRE adherents frame their early retirement goals in the ways that resonate with them emotionally. “When you’re driven by something you love, there’s a bigger emotional payoff. And it’s easier to stick to the plan,” he says.
While saving enough is critical to executing a FIRE plan, it’s just as crucial to allow for changing needs over time. “You definitely want to build flexibility into the plan,” De Santis says.
Uncertainty is unavoidable when crafting a financial plan, he says, and over a 40- or 50-year timeline it can be particularly pronounced. Projection bias—the tendency to assume that your thoughts, values and goals will persist indefinitely—compounds the issue. It causes investors to underestimate how much their wants will change as years pass, and it can hinder their ability to make suitable choices for their future self. For example, if you expect to live for decades in a tiny house and later decide you need more space, an inflexible retirement plan doesn’t allow the wiggle room needed to adjust to your changing circumstances.
De Santis offers solutions, including bringing awareness to the bias and seeking outside perspectives. Knowing that projection bias colors how you envision your future self helps you develop a healthy skepticism of your gut feelings. Bringing in an objective party, such as a financial advisor, can help you interrogate your plan, particularly the elements you feel the greatest emotional attachment to. Talking to individuals who have already executed FIRE plans can illustrate how plans can change over the course of a retirement and what is needed to address those changes.
To account for uncertainty, consider maintaining a constant flow of supplemental income. An active income stream is an economic buffer, and it can provide an opening back into the workforce should savings dwindle and an individual need to jump back into a career.
“You have to be ready to revise goals and change your approach,” De Santis says. He recommends reviewing your plan as frequently as every six months during your retirement to ensure that it remains viable and reflects your goals.
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