Where Behavioral Finance & Mental Health Meet

Introduction

In today’s fast-paced world, financial decisions are often made quickly, sometimes without fully understanding their long-term consequences. When those decisions don’t work out, they can lead to feelings of stress, anxiety, and even regret, all of which impact both mental and physical health.

Behavioral finance offers a helpful lens to understanding how psychological influences - like emotions, biases, and social pressure shape our financial behavior. Unlike traditional finance, which assumes people act rationally, behavioral finance acknowledges the powerful role our minds and emotions play. By becoming aware of these influences, we can learn to make better choices that support both financial success and emotional well-being.

Think back on a financial decision you’ve made in the past that you regret. How did it make you feel? Now contrast that with a decision you’re proud of. That sense of confidence and control isn’t just financial - it’s emotional. And the good news is, we can create more positive moments by understanding our mental habits.

Smart, informed financial decisions don’t just help our bank accounts, they can:

• Strengthen our decision-making skills
• Boost our financial literacy
• Increase our confidence in saving and investing
• Reduce our stress and anxiety

Let’s explore some common behavioral biases and how recognizing them can lead to healthier financial and mental outcomes.

Common Behavioral Biases and How to Manage Them

1. Loss Aversion

For most of us, the pain of losing is about twice as powerful as the pleasure of gaining. This explains why people might hold onto losing investments for too long, why they might sell winning investments too early, and why they might avoid investing in assets that have higher potential returns but come with risks.

Try this: Setting clear, long-term financial goals can help you stay focused and avoid making fear-based decisions that don’t serve you.

2. Anchoring Bias

We tend to rely too heavily on the first piece of information we receive. Like the “original price” next to a sale tag. That first number becomes an anchor, even if it’s irrelevant. When asked to estimate a value, people often start with an initial number and adjust from there, without questioning whether the anchor is too high or too low. 

Try this: Pause before deciding. Can you delay the purchase or look at multiple options? Doing some research helps you break free from the anchor and make more objective choices.

3. Herding Behavior

When we follow the crowd, we often ignore whether the decision truly benefits us. Stock Market Bubbles where investors poured money into companies without considering their actual profitability are examples of herding behavior. Another example is following the financial advice of those you know, without further investigation.

Try this: Seek out diverse, credible sources - especially experts or official channels like ssa.gov/news for Social Security information. Don’t rely solely on trending voices or headlines.

4. Overconfidence

Overestimating our ability to pick winning investments or timing the market can lead to costly mistakes. It’s like failing a driving test because you skipped the basics, like checking your mirrors before a turn.

Try this: Ask for feedback and stay open to learning. When something doesn’t go as planned, reflect on what you can take away for next time. Growth comes from honesty.

5. Confirmation Bias

We naturally seek information that supports what we already believe and avoid facts that challenge us, especially when emotions are high, as they are when we’re making major money decisions.

Try this: Acknowledge that we all have biases. Then actively look for well-rounded, fact-based perspectives. Go beyond headlines - the details matter more than the soundbites.

Final Thoughts

What I find fascinating about behavioral finance is how obvious some of these concepts seem and yet how easily we fall into their traps. Biases are powerful when we don’t recognize that they exist. Challenge your beliefs, especially around money.

Remember: most financial decisions don’t have to be made at the speed of light. Take a breath. Ask questions. Seek understanding. Use this article as a tool to remind yourself what to look out for, and how to respond more thoughtfully.

When you become a more mindful decision-maker, you're not just building financial stability, you’re nurturing mental clarity, emotional balance, and long-term confidence. 

Imagine this choice: “$10,000 more each year in guaranteed income, or a $140,000 lump sum today.”  Which would you choose?

In a recent survey, over 59.4% of respondents said they would feel more comfortable spending on non-essential items—like vacations or lifestyle upgrades—if they knew they had that extra $10,000 in annual income. Despite these theoretical benefits, few retirees choose to annuitize their retirement savings voluntarily. Economists refer to this discrepancy between expected and actual behavior as the Annuity Puzzle.

One of the main drivers of retirement behavior is the powerful fear of outliving one's savings.  This fear directly influences how—and how much—retirees are willing to spend each year. The longer you expect to live, the more cautious you may become, especially in the face of market volatility, inflation, and taxes.

But is the answer to spend less and rebalance your portfolio every year? Or could an annuitization strategy offer a better solution?

A Look Back: How Did We Get Here?

To understand this challenge, let’s look at how we got here. Historically, retirement income was largely funded through Defined Benefit (DB) plans, more commonly known as pensions. These plans date back to the Revolutionary War, when the U.S. promised retirement benefits to veterans. As the country industrialized, pensions became more common—particularly in government and healthcare sectors—and offered:

• Greater retirement benefits for those who live longer than average
• Simplicity, as the employer managed the investments, risks, and funding

However, increasing life expectancy and the rising cost of future benefit obligations (PBOs) prompted a shift toward Defined Contribution (DC) plans, like 401(k)s. These transferred the responsibility of retirement planning from employers to employees. To encourage participation, employers began offering matching contributions—but unlike pension guarantees, most of these matches aren't guaranteed long-term.

This shift brought new freedoms, but also new challenges:

• Complex investment decisions, often made without professional advice
• The risk of 401(k) loans and tax penalties for early withdrawal (before 59 ½)
• Inadequate education about plan structures and costs
• Limited investment options (often confined to public market funds)
• Tax implications—while contributions are tax-deferred, withdrawals are fully taxed
• State sponsored employer programs for workers who do not have an employer-sponsored plan vary widely and are often insufficient

According to the 2022 Federal Reserve Survey of Consumer Finances (Aladangady, Aditya, Jesse Bricker, Andrew C. Chang, Sarena Goodman, Jacob Krimmel, Kevin B. Moore, Sarah Reber, Alice Henriques Volz, and Richard A. Windle 2023), the average retirement savings by age 65 is just under $610,000—and the trend shows Americans are saving less.

This issue is even more pronounced for small business owners and sole proprietors (employers with 5 to 20 employees make up roughly 75% of U.S. small businesses, per the SBA). Many of them face fewer savings options and less support compared to employees of larger companies.

Solving the Puzzle: The Power of Annuitization

So how can retirees spend with confidence? In a 2024 study titled Retirement Income: A License to Spend (Blanchett and Finke 2024), the authors examined whether failing to annuitize income leads to behavioral and financial costs.

A key insight from their research: retirees with substantial savings often underspend compared to those with less wealth. Why? the study suggest a mix of factors:

• A desire to leave a bequest
• Uncertainty over life expectancy
• Concerns about rising medical costs
• A drive to increase asset levels—even at the cost of personal enjoyment

These behaviors reinforce the idea that people are reluctant to spend from non-annuitized assets—even when it’s rational to do so.

The research confirms this: converting wealth into guaranteed income—through annuitization—can free retirees from behavioral spending resistance and directly address the fear of outliving their savings.

The Takeaway: Retirement Income Should Feel Like a Paycheck

As employer pension plans decline, today's retirees and pre-retirees face a more complex financial future. One promising solution is to build a diversified retirement income plan—one that combines non-correlated assets with tax-efficient strategies and includes guaranteed income components.

By doing so, you can create a steady, reliable "retirement paycheck" that supports your lifestyle throughout your entire life.

Retirement Paycheck Bonus: Further Diversity Through Permanent Life Insurance

Another piece of the puzzle can often be solved by adding life insurance into your strategy, further diversifying your options. Permanent life insurance offers multiple unique benefits including: 

• Flexibility in payment options 
• Tax diversification using your principle as collateral
• Supplemental health care funding 
• Legacy funding

For example, if leaving a legacy to your beneficiaries or a charitable organization is high on your list, there are many ways to organize a life insurance policy to meet this need, often at a fraction of the cost of passing wealth after death dollar for dollar. Permanent life insurance can also provide tax-favorite options, including tax free loans to help offset spending shocks that often occur in retirement, at often the worst possible times. Another important benefit is that life insurance premiums are not subject to the ten-year rule of the S.E.C.U.R.E. Act.

You Don’t Have to Do it Alone: Finding the Right Partner

If you’re not confident that you have the right puzzle pieces to ensure your current retirement income plan meets your goals, the experts at Tamura Financial are ready to help you put the pieces together. We are licensed fiduciaries, meaning we are legally bound to act in your best interest, and have a wide network of trusted partners who have been helping clients achieve their goals for decades.  

1.Aladangady, Aditya, Jesse Bricker, Andrew C. Chang, Sarena Goodman, Jacob Krimmel, Kevin B. Moore, Sarah Reber, Alice Henriques Volz, and Richard A. Windle (2023). Changes in U.S. Family Finances from 2019 to 2022: Evidence from the Survey of Consumer Finances. Washington: Board of Governors of the Federal Reserve System, October, https:// doi.org/10.17016/8799 . 

2. David Blanchett and Michael Finke: Guaranteed Income: A License to Spend https://www.protectedincome.org/wp-content/uploads/2024/06/RP-28_BlanchettFinke_v2.pdf