Oct 21, 2023  | Tags: retirement

Our insights

Anchoring is a mistake that can weigh heavily on your retirement planning and ultimately your nest egg.

It is a behavioural bias that steers people toward old ideas, beliefs and information at the expense of more contemporary and relevant strategies.

The impact it has on retirement planning is an adherence to old and often irrelevant parameters that can potentially see the investor miss out on handsome long-term returns.

Anchoring bias usually happens subconsciously, affecting the investment decisions people make.

It may be the result of the first piece of information a person hears about a stock by the office water cooler.

Or it could be something steeped in family history, manifesting into a refusal to invest in shares because ‘Dad lost thousands of dollars in the stock market crash’.

Understanding that circumstances change, probably more so in economics than any other field, is key to avoiding succumbing to anchoring.

Anchoring in everyday life

Anchoring happens all the time in everyday life.

It is one of the oldest tricks in the retailer’s armoury.

Imagine shopping for a suit and seeing a nice one marked down from $1200 to $800.

Your first thought is likely to be the potential to grab a bargain and the instant saving of $400 that goes with it.

But how much is a similar suit elsewhere and does that $800 really represent good value?

Here’s another example. Taylor Swift sells hotel packages with floor seats for her Sydney concert for $1200 per person.

Travelling from Adelaide, that seems like a high price to pay and it is a number that becomes anchored in your head.

Instead, you purchase grandstand seats for $150, figuring you have made a significant saving.

But by the time you have added overinflated airfares and accomodation to the bill, you’re spent roughly the same amount of money, maybe more, and you’re watching from the nosebleeds.

You decision was overly influenced or anchored by the first price you saw.

Anchoring in retirement planning

Anchoring in retirement planning comes in many different guises and poses a significant threat to wealth accumulation.

That’s because poor investment choices based on outdated information can leave a portfolio anchored by an underperforming investment.

Even a person’s initial retirement goals and expectations may become anchors.

It’s not unusual for someone in their 20s to grossly underestimate the amount of retirement income they need compared to when they are middle aged.

By that time, their career has taken off, their family is established, their lifestyle is more extravagant and they have a clear desire for more income in retirement.

The impact of anchoring on retirement planning

Anchoring can affect retirement planning in many different ways.

Let’s say in the back of his mind, Geoff had always thought he would retire at 65 and had convinced himself he needed $600,000 in super by that age.

Those two numbers have become Geoff’s anchors.

But he wasn’t planning on being made redundant at 55 and paid out $250,000 for his 35 years’ service.

At the time, Geoff only had half his desired amount of super in his account but a lump sum that was going to go a long way towards achieving that goal.

As so often happens in life, the goalposts had moved and Geoff needed to move with them.

Anchoring can continue to affect seniors after they have retired.

Many retirees find themselves anchored by the minimum drawdown rates of their super fund.

That rate is 4% to age 64, rising to 5% from 65-74.

Hence that is the exact percentage many retirees draw down.

The result is they die with vast amounts of untapped funds because they could have drawn down more money in their retirement but chose not to.

They were ‘anchored’ by the first piece of information they encountered.

Overly optimistic anchoring

Arguably one of the worst mistakes investors can make is overly optimistic anchoring.

That is when they overestimate the likelihood of success and fail to realise the potential for adverse events.

It can occur when people disregard warning signs or persist with an investment that simply isn’t delivering.

Let’s say an investor buys a share at $10 and watches that stock fall to $7.

They may be unwilling to sell the share until it recovers its value.

It may be wiser to cut their losses and reinvest in a better-performing stock.

But they don’t do that because they are ‘anchored’ to their initial buy price of $10.

Setting realistic goals

Keeping goals attainable but realistic is the first step to avoiding the trap of optimistic anchoring.

Creating a financial plan capable of weathering up to five decades of different economic circumstances demands adaptability and the willingness to change course when required.

Don’t become anchored!

Regularly review your investment and retirement plans to ensure they remains on track and robust in a changing economic environment.

As always in investing, diversification is your best friend and strongest shield against challenging market forces which have the potential to derail your fortune.

Combating anchoring bias

It’s easy for people to become set in their ways and become averse to change or new ideas.

But this leaves them prone to anchoring bias.

There are many way to guard against anchoring bias:

• regularly reassess your retirement plans to ensure they remain aligned with your goals and desired lifestyle

• consider how the economy is changing including market forecasts, interest rates and inflation

• always be open to what other industry professionals are saying

• read and absorb as much information as you can including opposing viewpoints. Don’t seek confirmation bias by looking for views which align with your own.

• talk to an experienced financial planner who may offer a different perspective on your investments 

Get advice today

Nearly everyone means well when it comes to financial advice – your parents, your friends, your boss and other work colleagues.

But sometimes without even realising it, we can become anchored by a value or an idea which is working against our best interests.

Even Tiger Woods needed help with his swing from time to time.

That’s why when it comes to doing what’s in your best interests, you should never be afraid to seek out the best financial advice you possibly can.

That’s where Calder Wealth Management can help.

CWM are financial experts who can run a second set of eyes over your investment strategy to ensure you’re not missing a trick.

We can act as your financial mentor and even help you start your savings plan from scratch.

It’s never too late!

Whatever your financial goals, we’ll work with you to devise and implement sound investment strategies.

No-one should do without quality financial advice from someone personally invested in their wealth accumulation.

At CWM we pride ourselves on leading our clients into the future with structure, financial stability and confidence.

Contact us today to discuss all of your financial needs and concerns.

Written by Jodie Schroeder.

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.