3:1 ratio in retirement planning

You all may have come across various personal finance ratios like savings ratio, life insurance coverage ratio, liquidity ratio, etc. All these ratios are quantitative in nature. However, many psychologists around the world have found that behavior is something that determines the outcome. Retirement planning is not different. During retirement it is experiences that matters much than anything else. 3:1 ratio does exactly the same. It looks at the behavioral aspect of the personal finance rather than quantitative aspect.

So, what is this 3:1 ratio? 3:1 ratio, also known as positivity ratio, denotes that for every one negative experience there should be at least three positive experiences. Psychologists believe that people usually react strongly to losses and negative experiences than they do to positive experiences and gains. For many people negative experiences becomes more powerful than the positive one. If we look at this from an investment perspective then regret from a loss is way more than the satisfaction from the gain.

The positivity ratio holds to the concept that people need day to day satisfaction and positive experiences that exceed their negative experiences to be happy. So, how does it help you in planning your retirement. The three main things that would give positive experiences in retirement is regular income, medical expenses are covered and hobbies. People should strive to plan for these three to help you be happy during retirement. It is to be remembered that it’s not just about numbers but also about your financial behavior. Numbers can only give you what is required, but how to reach these numbers depends upon your behavior.