Preparing for the financial unknown

People aren’t very good at predicting the future, but that doesn’t mean we shouldn’t try to prepare for it. As employees develop financial strategies to help them plan for what’s ahead, uncertainty about the future could derail their best intentions. Behavioral finance offers a new way of thinking about and planning for the future. It suggests an approach that shifts attention away from unknown external factors to what’s within employees’ control.

What is behavioral finance?

Behavioral finance is a field of study that draws upon both finance and psychology to examine why investors make irrational—and often costly—investment decisions and how they can make better ones. Integrating behavioral finance concepts, tools and resources into your financial wellness program can help guide employees to more rational investing behaviors and help them make better financial decisions.

A good place for employees to begin is with their own lives and goals—this is the heart of a goals-based approach to investing. Merrill’s seven life priorities—family, finances, giving, health, home, leisure and work—offer a solid framework to help employees begin thinking about their lives and what’s important to them. Based on this framework, they can then consider what would be important to their future selves.

As employees consider what the world will look like in the future and what their own lives hold in store for them, they may misjudge some of the factors that are key to knowing how to plan for the future. For example, people often underestimate life expectancy and overestimate career span, while sometimes neglecting to fully factor in the cost of health care and the complexities of financial markets.1

Once goals are outlined, it’s a good idea for employees to field test them with friends, loved ones and advisors. An advisor can be an invaluable resource, by stress testing scenarios and helping employees develop actionable next steps toward their goals. Regular check-ins and reviews of their plans can help employees stay on track, make confident goals-based decisions, and feel more prepared for what’s ahead.

Key takeaways

Offer on-site workshops and one-on-one consultations with a financial wellness specialist or advisor.

Promote the educational resources on the Education Center, which is organized by the seven life priorities and can help employees connect to information and tools to help them address their own priorities.

During open enrollment season, encourage employees to check in on their retirement plan to make sure it is still aligned with their goals.

1 For a thorough review of these four risks to retirement, as well as an examination of strategies to mitigate these risks, see, “Tackling Retirement Risks,” by David Laster, Nevenka Vrdolijak, and Anil Suri. Wealth Management Institute, Spring 2015. Consider also, “The Rise and Fall of Performance Investing,” by Charles D. Ellis, CFA. Financial Analysts Journal, Volume 70, Number 4. CFA Institute, 2014.