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3 Ways Your Brain is Derailing Your Retirement

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Much like flossing and losing those last 10 pounds, saving for retirement is often something you plan to do "later" and always feel vaguely guilty about. It's hardly fun to think about retirement planning, and the decisions you have to make are hard. For many people, even just looking through their company's 401(k) pamphlet is enough to cause a minor panic attack.

Frankly, your inability to save for retirement isn't entirely your fault. It's your brain's fault.

Your brain is actually doing its level best to keep you from successfully planning your retirement. Here are three ways that the quirks of the human brain can sabotage retirement planning -- and what you can do about them:

1. Your brain thinks that your retired self is a stranger.

I once worked with a woman who claimed she didn't save for retirement because she wanted to enjoy her money while she was young. Even though her actions would have a direct and very negative consequence for her in the future, she simply could not make herself care about the person she would become.

That's because my colleague had fallen victim to a cognitive bias (that is, an illogical thought pattern) known as hyperbolic discounting. Basically, we all have a tendency to prefer immediate over delayed gratification, even if waiting means that we'll be happier and better off. Anyone who has ever been unable to pass up the donuts when on a diet understands this cognitive bias.

Part of the reason why it is so very easy to discount the needs of your future self is because your brain is actually wired to see that self as a stranger. According to Kelly McGonigal, author of 'The Willpower Instinct,' when we think about ourselves in the future, the part of our brains that we use to think about that future self is the same one that we use when we think about a stranger. Which makes it awfully difficult to care about that future self's needs.

The Fix: Use your lack of connection to your future to your advantage.

While it's very difficult to give up money right now in order to benefit your future self, it's a great deal easier to give up future money for that future self. That is, behavioral economists Shlomo Benartzi and Richard Thaler have found that most retirement plan participants are not willing to immediately increase their savings rate based upon a financial adviser's recommendation -- but 56 percent of participants in their study were willing to increase their rate of saving by 3 percent per year in the future.

What this study has shown is that we are much more willing to plan to give something up in the future than we are now. The good news about this is that the plan participants who do commit to saving more each year in the future end up saving more overall than those who have the willpower to give up money now.

To take advantage of this in your own retirement planning, check to see if your employer's retirement program offers a contribution rate escalator, which will automatically increase your savings rate each year. Then, you can plan for the additional savings now and not have to lift a finger to do it in the future.

2. Your brain refuses to make a decision until the conditions are perfect.

Prior to the 2007 implementation of automatic enrollment in company 401(k) programs, many a new hire found him or herself putting aside the enrollment information to deal with later -- only to find months or even years passing without signing up.

It's a natural problem: You know that enrolling in your 401(k) is an important issue and one that deserves your best thinking, but it's also one that is confusing and difficult to give your best thinking to. So, you put it off and make no decision at all. This is the very definition of analysis paralysis.

Thankfully, the new rules allowing for automatic enrollment have helped to improve this issue -- but they haven't solved it. That's because in addition to enrolling, most 401(k) participants also have to choose their investment strategies within their program, unless they want to keep the default. And with the huge number of options available, many workers put off making a decision and lose years of potential earnings to their analysis paralysis.

The Fix: Let go of perfect.

The underlying basis of analysis paralysis is the feeling that there is an ideal solution out there. But chasing perfection is the way madness (and lost interest) lies. Instead, it's better to set up your "good enough" parameters and pick something within those parameters. This can be done no matter what your level of financial literacy.

For instance, if you feel completely at sea as to what kinds of asset classes to choose and worry that you need another degree in order to simply understand your options, then decide to spend no more than an hour learning about the basics online. Come back to your enrollment materials with your new knowledge and see if you feel more comfortable making choices. This will break your decision-making process down into manageable pieces, rather than seeming like a huge decision that you don't have time for.

3. Your brain shuts down in the face of too-big goals.

Saving for retirement is problematic for many people because it is not exactly a tangible goal -- unlike saving for a fabulous vacation or even a down payment on a house. The retirement investment goal is so big and amorphous that it's difficult to wrap your head around, and therefore difficult to commit to. Without seeing that you're making any progress on a goal, you might just quit saving altogether.

The Fix: Give yourself short-term goals that help you accomplish your long-term goal.

If you want to take care of your retirement needs, you have to find ways to fulfill your need for short-term gratification. For instance, deciding to "save more for retirement" is too vague a goal. How will you know you've accomplished it? Instead, you could make a short-term goal that you will max out your IRA contribution this year. Succeeding in this goal will give you an emotional boost -- and it will also help your big retirement goals.

Remember: Your Brain Isn't Trustworthy

The human brain is pretty well-equipped to handle immediate problems and issues, but it's not so hot at making plans for the future. If we allow our brains to make default decisions, we'll all end up cursing our younger selves from the retirement home. It's better to remember our brains' shortcomings and plan around them.

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