Loss aversion
’A loss is more painful to people than an equivalent gain is rewarding’
We fear loss more than we value gain. Our evolutionary ancestors may have enjoyed having too much to eat, but not having enough could be fatal. And our aversion to loss increases during retirement:
- A US study found that the act of retiring makes people more risk averse. Loss of salary and the uncertainty of knowing how long money has to last underpin this fear.
- A separate US study found that people who annuitise have lower levels of depression. Not knowing whether you’ll run out of money is unsettling.
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Attitude to loss and capacity for loss will undoubtedly form part of your current process, but it might be worth exploring how important it is to be free from money worries in retirement. The US survey suggests the emotional benefits of having a guaranteed income may, for some people, outweigh the financial benefits of a potentially higher income.
Of course, it doesn’t have to be a binary decision. You can cover essential expenses with a guaranteed income and invest the rest.