Mark Hoaglin: This is episode three of the My Retirement Playbook Podcast.

Mark Hoaglin: Hello, everyone. Welcome to the My Retirement Playbook Podcast. I'm Mark Hoaglin, CERTIFIED FINANCIAL PLANNER®, and your host of this weekly podcast, where we dig into all things related to retiring and planning for retirement, specifically around retirement planning, financial planning, and we try to cover all the bases in that regard. And this week is no exception. We're going to talk a little bit about behavior. That's a big, broad topic, but specifically, as it relates to how your behavior, how your life experiences impact how you interact with money, how you view money. And again, this is all part of my belief that if you desire true peace of mind in your financial life, then getting consistent financial education and coaching is a must.

Mark Hoaglin: And a big part of financial coaching is talking about your relationship with money, and that involves things somewhat behavioral science-oriented if you will. We're going to try not to get too geeky this week as it relates to the psychology or psychological aspects of money and financial planning. But it's very important that we do get a grasp of that because it is in my opinion, part of the foundation of a successful retirement plan, a successful financial plan. So we're going to talk about the six stages of behavior change as it relates to finances. And we'll talk a bit about what you've experienced in the past as it relates to finances and how that relates to your current view of money.

Mark Hoaglin: So why is behavior such a big deal as it relates to retirement income planning? Well, I've included in the show notes my retirement mastery pyramid. I developed this a while ago as a foundation for my financial coaching because it really shows the relationship of things like behavior and... well, actually it shows it's a process. What it does is it demonstrates that developing a successful retirement plan is a process. And as with all processes, you can't skip around and go from step one to step five without going to step two, three, and four. And if you do, you're going to miss out on a lot and you're probably not going to have a successful experience.

Mark Hoaglin: So in my retirement mastery pyramid, and I've included a copy or a link to a copy in the show notes. At the very bottom of the pyramid, I have these behavioral things, things like your life experiences. The old saying that we're a product of our life experiences, well, it's certainly no exception when it comes to how we interact with money. What money lessons did you learn from your parents, or did you? Again, that can impact how you currently view money and interact with money. What are your spending habits, your financial habits? Are they good, bad, otherwise? Those kinds of things can... Well, certainly the bad habits can hinder you on this journey.

Mark Hoaglin: Lifestyle, that's another behavioral component. Do you live within your means? What lifestyle can you, or do you want to maintain when you get to retirement? And of course, beliefs about money. Do you see money as a friend? Is it a foe, an enabler, or a liberator? Those are all things that have to be dealt with at that foundation level of the pyramid. Now, of course, at the very top of the pyramid is what I call retirement mastery. That's where you've successfully navigated each step of the process, which includes among other things, establishing goals, developing your risk tolerance, developing a financial plan, your investment selection, executing the plan, making adjustments, and maintaining.

Mark Hoaglin: And then finally, that retirement mastery step, the final step. Which is really not such so much a step as it is an experience. When you finally feel free from, well, I call it the chains of your financial past, in many cases, and you're living the retirement of your dreams or at least retiring on your own terms.

Mark Hoaglin: All right. So let's dig into this idea of how do we change behavior or what are the behaviors we actually have to change and how do we change our behaviors as it relates to money if they're getting in the way of our achieving retiring on our own terms, or at least, the financial planning goals that we've established. A lot of you probably have interacted with a financial advisor in your past, and it may have been a good experience, and it may have been a bad experience. And as I talk to people, sometimes those bad experiences involve a financial advisor who really didn't get to know the individual. They sat down and it was almost like an interrogation.

Mark Hoaglin: They started firing off a lot of questions about their finances and recurrent investments. And people sat there feeling like they weren't being heard or they weren't being respected. And a lot of times people come out of those kinds of situations very frustrated. So the successful, what I call the successful financial advisors, they really understand what I call the psychology of the buying decision, or the decision to agree to move forward even if you're not actually buying something. It's that decision to say, "Yes, let's move forward." So this whole concept of uncovering problems, first of all, you have to admit that there's a problem in the first place. And that's where we get into these six stages, if you will, of changing your behavior.

Mark Hoaglin: So what I'm going to talk about are the results of some research that took place back in the 1990s. And a group of psychologists, scientists, they studied people who had made some significant changes in their lives and looking for those common factors. In other words, think about your own life. When you've made a significant change on your own, you probably don't realize it, but you went through a process. So we want to talk about, well, what is that process and what are the different stages in this process? So, first of all, you have to understand or acknowledge that there is a problem in the first place. And that's what step one is all about. It's called the pre-contemplation stage.

Mark Hoaglin: So again, I told you we're going to get a little nerdy with some of our terminology here when it comes to discussing the whole psychology of behavior around making financial decisions. For lack of a better term, call it the denial phase. It's that phase where you might be where you don't know what you don't know. So you might be in a situation where you're spending down your retirement savings, or you're maxing out your credit cards, you're giving money to your adult children, or some other financial chaos might be going on in your life. And at the same time, you might be thinking that well, yeah, I'm doing okay. My financial house is in pretty good order.

Mark Hoaglin: So what you're doing is you're really denying that there's a problem here, and you don't really know what to do because you haven't been exposed to some possible solutions. Or in some cases, you might be blaming your parents or you might be blaming somebody else. So that's this denial phase. So for example, let's just say we have an individual, let's call her Sally. So Sally's been saving for her future. And she decides, you know what? I probably should go talk to a financial advisor or a financial coach. So she goes and sits with her planner. And the planner says, "Well, Sally, you've got all of your money in certificates of deposit, CDs."

Mark Hoaglin: And after talking to Sally, the planner says, "That's probably not going to get you where you want to go in terms of your retirement goals." Well, Sally thought she was investing. She didn't know that just putting her money in CDs was probably not the best way to get to her retirement in 10, 15 years, or whenever she decides to retire. So again, nobody taught her about diversification, and as a result, she wasn't quite ready to consider any new investment strategies because it just seemed so intimidating at that point. So she was probably somewhat reluctant to turn her funds over to this planner because she was still in that kind of a denial phase, if you will, or that stage of, I don't know what I don't know, which can be very intimidating. So that's stage one, which is, let's just call it the denial stage.

Mark Hoaglin: So stage two, okay, we've gone through this denial stage. We've been exposed to some other options that could help us, but we're still not quite convinced at that point. But maybe we're ready to acknowledge that, yeah, we've got a problem. I've got a problem. I've got a spending problem. I have a problem where I'm investing my money in the wrong investment vehicles. My 401(k), maybe it's not invested properly, or I'm not putting enough money into my 401(k) or whatever the situation is. That light bulb went on and you realized there may be a problem. That's the second stage that we call contemplation. So this is where you start believing that the problem might not be somebody else's fault.

Mark Hoaglin: So you start thinking a little bit more seriously about how your financial situation is going to impact your future. And now maybe you start thinking a little bit more about that financial planner's recommendations and what he or she recommended to you even though you weren't quite ready to jump into those recommendations in stage one. So you're open to gathering a little bit more information to learn about the causes of those problems that you currently face with your finances. But in spite all of that, you're still not quite ready to make a change. You're thinking about it. So we call it contemplation. You can call it examination where you're thinking about your situation and what the options are, what you might take as a next step.

Mark Hoaglin: So there's a little crack in your doubt, so to speak, but you're not 100% there yet. So putting this in real terms, going back to Sally. So at this stage, Sally starts looking more into this whole idea of diversified investments, for example, that her planner made reference to in their first meeting. And she says at this point, "Well, maybe that's a good idea for some other people, but I'm not sure that that's quite what I would need to do at this stage." However, Sally's willing to at least consider it. So that's this second stage, is the examination stage. So as I describe these stages, you'll see why you have to go through each one. You can't just jump from step one to step three or step one to step four. It's like most things in life that you learn and you change and develop. It's a process.

Mark Hoaglin: So the third stage is what we call preparation. So this is where, again, you've gone through the denial, you've gone through the examination, you've listened and you've thought about recommendations that I have made to you. And here's where you're going to make a commitment to change. This is the preparation change. So dealing with maybe not everything, but at least one aspect of your financial situation all of a sudden, well, not all of a sudden, but it becomes a priority at this stage. So you go from gathering information about the problem to gathering information about ways to solve the problem. So that's the big breakthrough in this stage is that you're actually considering solutions.

Mark Hoaglin: So you're thinking about an action plan and maybe getting back together with that financial planner and actually putting a plan together. So you kind of lift your head up and now you're looking more towards the future instead of just looking down right now at the present. And what does that do for you? Well, it gives you a picture of what life could look like if I solve this financial problem. So it's another way to describe determination. So at this stage, Sally would have decided, let's just say that again, "That diversification idea probably is a good idea, and I want to carry that out," she says. So she'd go back to visit with that planner, collecting information, maybe getting some information from some other sources and thinking more about how can I put this plan into action? How can I actually make this change?

Mark Hoaglin: And that leads into step four, which is the action stage. So this is where the real change takes place. So this is where Sally implements and carries through with that plan that the financial planner, the financial coach put together. Now, it's the shortest of all the stages because this is when you're going to cut up your credit cards, start paying down your debt, put together a will, and create a spending plan to solve some of those long-term financial difficulties. This is the stage where Sally listens to and acts on the advice from her planner that she met with back in stage one. So in our example, this is where Sally would actually her money out of those CDs that she talked about in that initial meeting with her financial planner.

Mark Hoaglin: And she would actually invest it in that diversified portfolio that the planner recommended based on when Sally told her she wanted to retire. But see, Sally had to go through those first three stages in order to get to this point. She couldn't go from denial to this. She had to actually go through those intermediate two steps or three steps in order to get to that action phase.

Mark Hoaglin: Now step five, her stage five, this is the maintenance stage. So this is where you're learning how to implement and live with those behaviors that you've learned so far. And so you're working in a partnership with your planner in this space and you're reacting to market turmoil like we're experiencing now during this COVID-19 lockdown environment and your planner is making recommendations and explaining, do I need to do anything? Do I need to adjust my portfolio? Whatever it is. Maybe Sally lost her job during this COVID-19 environment and had to make some changes to her spending plan. So it's a maintenance mode. It's not that time where you're questioning or being suspicious. It's really an opportunity to work your plan and maintain your plan in step five.

Mark Hoaglin: It's also a time where there may be some doubt that creeps in. So for example, Sally being used to those CDs that are government-insured and have a fixed return on them, she's seen a little volatility in the market, so there might be a little bit of buyer's remorse going on. But again, as she works with her financial advisor or partner, the advisors, or excuse me, the financial planner is able to explain what is going on. Do I need to make any adjustments? Yes, no. So the buyer's remorse may come about, but it's overcome due to this partnership and due to the fact that Sally has gone through these first four stages.

Mark Hoaglin: And then step six is what we'll call the integration phase. So this is where your financial plan is a part of your life. You've integrated a healthier feeling about yourself, and you've made some good financial habits through this process. And your planner becomes your kind of a longterm partner in this financial arrangement that you've made or this financial planning arrangement that you've made. And at this stage, Sally is completely educated and she understands, and she wouldn't consider putting all her money in a CD as she did before because she knows better and she has a belief that this diversified portfolio is the right thing to do and is going to help her get to her longterm goals.

Mark Hoaglin: So those are the six stages that one has to go through to change behavior when it comes to your finances. And I mentioned earlier, my retirement mastery pyramid. So what I thought I would do is just relate each of these steps to the levels in the retirement mastery pyramid. And again, you can download a copy of that in the show notes at myretirementplaybook.com. In episode number three, there's a link there for the retirement mastery pyramid. And what you'll see is essentially there are six tiers in the retirement mastery pyramid. So we talked about this pre-contemplation stage or this stage of denial and the resources that help you overcome that are in the first level of the pyramid. So I mentioned your life experiences.

Mark Hoaglin: So getting a grasp on how you were raised with money, your parents, what was the influence you had from your family as it relates to money, talking about your habits, your spending habits, those are going to facilitate if you will, this denial that you might have in that first stage of the behavior change. Understanding that, understanding your lifestyle. Do you have a spending plan? Are you living within your means? And your beliefs in general about money. I mentioned, is money your friend or foe? How do you feel about money? And you really have to understand those things in order to get beyond this stage one, if you will, of the behavior change, this denial stage.

Mark Hoaglin: In stage two, once you get beyond that, and now we're into stage two, which is that preparation stage. So here's where we talk about financial goals in more detail. We look into your risk tolerance. We talk about, what's your attitude? What's your overall feeling at this point about your financial future, about your retirement? I talk about aptitude, everyone's good at something. And is there something that you can enjoy in your retirement to bring enthusiasm to this journey? It doesn't have to be all just dollars and cents and financial plans. It's about what you really want to do in retirement and how you want to enjoy retirement. So that's all part of that preparation stage, if you will.

Mark Hoaglin: And then the action stage, where we actually start putting a plan together, that's the third level of the pyramid. You get advice, put a financial plan together, develop some degree of certainty around, or what is the probability that you'll achieve your retirement goal if we follow this plan? And then what are some of the resources that you can trust? And you can use your planner, use your financial coach, financial advisor as a filter for that information. Reminds me years ago when I had a serious illness and I took it upon myself to really educate myself around my illness so that I could use my doctor as a filter. So when I went to see my doctor, I would tell him about the latest article I read in the New England Journal of Medicine and had he read it, what does he think?

Mark Hoaglin: And so it really helped us form this partnership where he wasn't just patting me on the knee telling me he was going to take care of everything. I obviously had trusted him, but at the same time, I was part of that partnership by educating myself and then using him as a filter. It's the same way with you and your advisor or your financial advisor or coach is bounce information that you've read or that you heard on MSNBC, whatever, because that's the way you're going to become educated. And that's again, how you develop that peace of mind in your financial life.

Mark Hoaglin: And then that maintenance stage, that's level five of the pyramid. This is where the plan, which is a dynamic document essentially, it's going to adjust to the economy. It's going to adjust to any life changes that you have. And that's all part of the process. Just because you put a financial plan together, it doesn't mean it sits on the shelf and you never change it. No, it's a very dynamic document, a very dynamic process. Just like right now in this environment we're in with the uncertain stock market and the economy and unemployment rising, that impacts and will impact your financial plan some more than others. But now is the time to have those kinds of discussions with your coach, with your financial planner.

Mark Hoaglin: And then the integration phase, which is the top. I call it retirement mastery. This is again, where, it doesn't mean you know everything you need to know, but you know enough to have that peace of mind. That is the top of the pyramid, that is the final stage in changing behavior when it comes to your financial behavior. And that's how I integrated it into my retirement mastery pyramid. So I hope that was helpful. I hope I didn't get a little too geeky when it comes to the psychology. The important thing to take away is that making change in your financial life, if you're not happy where you are right now with your financial life, there are changes that you can make, and it is a process. So don't worry.

Mark Hoaglin: Don't put too much pressure on yourself to think that it's going to happen overnight. Work with a financial coach. Work with someone who understands this approach to the business. There are a lot of people out there that'll take your money and invest it without really doing a lot of research into your relationship with money. And that's not good business in my opinion. So it's important that you develop this understanding around why you make the decisions you do when it comes to money and are they good decisions? Are they bad decisions? Going through this process, the six stage process will help you develop more confidence in your financial plan and it'll get you to where you want to be.

Mark Hoaglin: And that's the most important thing when it comes to your money and your retirement planning. So once again, feel free to go to the show notes. You can download a copy of that retirement mastery pyramid. You can get more information on this concept of the six stages to successfully change your financial behavior.

Mark Hoaglin: And then finally, let me touch on the financial coach's role or the financial planner's role in this process. First of all, it's achieving clarity and understanding for you around your financial behavior. It's holding up a mirror in a sense so that you can see and understand good behavior, bad behavior, how it all impacts the financial decisions that you make and have made in the past. A good financial coach, a good financial planner will provide that education and direction for you when it comes to your financial life. He or she will develop a plan. They'll help you execute that plan and they'll guide the maintenance of that plan to keep you from falling back into old behaviors. So those are the six things that a good financial planner or financial coach can do for you in this process.

Mark Hoaglin: And if you'd like more information about my financial coaching, feel free to go to the myretirementplaybook.comwebsite/coaching. And you'll get a little bit more information about how I approach this whole concept of financial change.

Mark Hoaglin: All right, it's time for our question of the week. If you'd like to ask me a question, there's a couple of ways you can do that. One is go to myretirementplaybook.com and you'll click on the voicemail box there on the right hand side of the page. And you can leave a voice question if you would rather do that. You can also go to the podcast page, just go to the top of the page, click on podcasts. And there's a box there where you can leave me a question. So a couple of ways that you can ask a question about finances in general, or some specific question about your financial life. And I'll be happy to answer it, whether I answer it on the show, or just send it to you directly. Either way, I'll be sure to get all questions answered that are submitted to me.

Mark Hoaglin: So this week's question comes from Joan in Seattle, Washington. And she writes, "You discuss the importance of risk tolerance a lot. Why is it so important to my financial decisions?" Yes, I do talk a lot about risk tolerance because I think... well, for a couple of reasons. One is I think it's a very commonly overlooked part of the financial planning process. Depending on who you're dealing with, as I've said before, if your planner or financial advisor doesn't talk about risk tolerance very early in the conversation, you're probably not working with the right person. Risk tolerance is, in my retirement mastery pyramid, it's part of the foundation.

Mark Hoaglin: When I talk about financial goals, when we talk about your plans for your future, risk tolerance is a big part of that because risk tolerance is, think about it as the GPS of the financial decisions that are made when it comes to your money. If you want to get a 20% return on your money without taking a lot of risk, it's not going to happen. You're going to have to take risks. And then the question is, can you sleep at night knowing that you could sustain some pretty significant losses in addition to the opportunity to experience some pretty significant gains? So there's a lot of volatility in a very aggressive portfolio for example. Some people are very comfortable with that. You might not be.

Mark Hoaglin: So again, it's not a one size fits all when it comes to risk tolerance. On the other end of the spectrum, if you're risk averse and you're comfortable with CDs and you can't accept any volatility, then you're going to get a lower return on your investments and it's going to take you longer in most cases to get to your retirement goal. That's not a bad thing, but it's just a matter of matching expectations. If you meet with somebody that says, "Oh, I can get you a 10% return on this investment, and it'll only take you 10 years to get to your goal." And you say, "Well, that sounds great." Well, then you think about, well, what's the downside? What's the volatility I can expect in that kind of a portfolio?

Mark Hoaglin: And all of a sudden you realize, oh gosh, no, I don't want to be off the prospect of losing $10,000. I just couldn't sleep at night. Well, okay, that's the wrong portfolio. That's not a good match with your risk tolerance. I'll put it in the show notes a link to a free ebook that I wrote about how to determine your risk tolerance, why risk tolerance is important. So I encourage you to take a look at that. There's an assessment in that ebook that you can take to get a better idea of what your unique risk tolerance is. And that's something that I would encourage you to do and take with you when you meet with a financial advisor or a financial coach so he or she can get a better of where you are when it comes to comfort and investing your money.

Mark Hoaglin: Don't let anyone shortchange you on that or minimize that in any way, because again, your risk tolerance is as unique as your fingerprints. And what uncle Charlie's comfortable investing in, you may not be. How your coworker has their 401(k) allocated hopefully works for them, but it might not work for you. So you have to avoid those, "Hey, I found this great investment," or now of course, with social media, you get all kinds of advice. If you go to my blog a couple of weeks ago, I wrote a blog post on Bitcoin. A retirement planning page that I frequent on Facebook, a young man was talking about investing in Bitcoin. He said he was in his 20s and he wanted to retire in his 30s. He didn't believe in a 401(k). And he was going to put all of his money into Bitcoin.

Mark Hoaglin: Well, without going into a whole lot of details, but feel free to read my blog post on that, that's a very volatile investment strategy. So for somebody in their 20s who has a long way before they get to retirement, even though he says he's going to retire when he's 30, he could afford to probably lose more than say somebody that's in their 40s, 50s, and 60s. So getting social media or getting investment advice from social media is not something that I recommend. Because again, people tend to say, take a one size fits all approach when they make these kinds of recommendations. And that's just not good investment advice. It's not a good investment strategy. So be careful of that.

Mark Hoaglin: So thank you for the question, Joan, around risk tolerance. If you'd like more information, again, go to the show notes and click on a link for a copy of the ebook, My Risk Tolerance, and you can take your own risk tolerance assessment as part of that ebook.

Mark Hoaglin: So that will wrap it up today for episode three of the myretirementplaybook.com podcast. And I hope this has been helpful for you as it comes to developing change in your financial life and helping you get beyond those limiting beliefs or the limiting behaviors that you have when it comes to developing a successful retirement income plan. I'm Mark Hoaglin, CERTIFIED FINANCIAL PLANNER®, and I look forward to catching up with you again next week on My Retirement Playbook Podcast. Have a great week, everybody.