Every financial advisor should have a behavioral finance toolbox, said Brian Gaffney, CEO of Allianz Global Investors Distributors, and luncheon keynote at the Financial Behavior in Retirement Summit in Chicago on Monday.

Gaffney’s talk, “Behavioral Finance and the Post-Retirement Crisis,” was aptly named: This country is truly in a post-retirement crisis and the job of advisors is to ensure people retire with dignity.

But how can advisors do that? The answer: framing. How an advisor frames the discussion will determine client decision-making.

One framing device, Gaffney suggests, is the virtual immersion test. The more vividly an individual can see their future the more they save. In an experiment Gaffney described, those who were shown what they would look like in 30 years doubled their savings. The situation didn’t change: Saving for retirement means that clients need to change what they spend today, but those who saw a simulation of what they would look like in the future – and saw that they would be happier- saved more.

The reality is there is variability in longevity and it is impossible to know when a particular client will pass away. Out of 10 people, one will die at age 69 and one will die at 99, Gaffney said. “How do you plan for the fact that one person will live four times as long as another?” he asked. With auto-enrollment in 401(k)s individuals don’t have to take any action and savings has gone up dramatically.

Another critical point advisors should take into consideration is hyperloss aversion: individuals are twice as sensitive to loss as they are to winning. This means that losing $100 feels twice as bad as winning $100. Forty-nine percent of retirees would not even risk $10 to win $100, Gaffney said. Understanding this aversion to risk is important in comprehending clients’ goals.

But beware: the quality of decision-making starts to decline at 53, Gaffney said. “We are asking people to make very important financial decisions when dementia may already have set in,” he explained.

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