Apr 04, 2024  | Tags: Retirement, psychology

Our insights

Most people in the workforce should know that retirement planning is essential.

Regardless of whether or not they choose to do it, how much thought they put into it or how much they invest, the benefits of building and saving for retirement are widely understood.

Yet there are still so many factors that can derail a sensible retirement plan.

Many of the decisions we make regarding our retirement planning are susceptible to cognitive biases.

Poor decisions based on misinformation, a lack of understanding or simply losing focus on what is important can hamper our savings plans.

These mistakes can ultimately cost thousands upon thousands of dollars.

Common cognitive biases in retirement planning

Here are some of the most common pitfalls or cognitive biases when it comes to retirement planning.

Confirmation bias

You were talking to someone at the pub who told you a particular stock or fund was an excellent buy.

You googled it, immediately found a story supporting the view and invested.

The mistake you may have made is ‘confirmation bias’.

It is seeking information that confirms your pre-ordained view rather than searching further for opposing opinions.

Searching for information that invalidates a particular viewpoint is every bit as important as finding supporting views.

Information bias

There is a world of information about investing, whether in cyberspace, the newspapers, on TV or talking with work colleagues around the water cooler.

The key to avoiding this bias is knowing how to separate the good information from the bad.

Anchoring

Similar to information bias, this is when someone focuses too much on one shred of information and then anchors their behaviour to it.

For example, a share trader may value a stock at a certain price and then fail to adjust their assessment based on market forces and the performance of the company.

Money vs price illusion

It’s easy to assess our income and total wealth in dollar terms without adjusting it for inflation.

If your super rises by 5 per cent but inflation is running at 6 per cent, you’re going backwards!

Loss aversion

This is a negative behaviour when an investor is more cautious about not losing money rather than taking a risk and making money.

It results in people holding poorly performing investments including super funds longer than they should.

Framing

This occurs when a financial decision is framed as either a negative or positive.

It is human nature to choose the latter but sometimes the reverse is not really a negative and is a better option.

A classic example is the belief that retirees shouldn’t eat into their capital but live only off the interest earned from their investments.

The end result is many Australians dying with vast amounts of their super unused, having lived their retirement years well below their means.

Hindsight bias

This is when people believe they could have predicted a particular event – yet in reality they didn’t.

It can lead to overconfidence in making future decisions which are often risky and based on financial prowess they do not possess.

It can put a severe dent in their retirement planning.

Bandwagon effect

Another common human frailty in terms of investing is the bandwagon effect or herd mentality.

It occurs when a number of people, often friends, decide to invest in a particular asset.

It ignores independent thinking and appraisal and is instead beholden to FOMO or the ‘fear of missing out’.

Overcoming cognitive biases

Here are some practical strategies to employ to help you overcome cognitive biases in retirement planning.

Education 

You can never have too much of it and cognitive biases are no exception. Be aware of the major ones and consider carefully if you are prone to them.

Seek multiple opinions 

Don’t rely on one source. Garner the thoughts of financial advisors and professionals, credible friends and family members (but bear in mind that not all are qualified to give an opinion!), assessing different viewpoints to make better decisions.

Set clear retirement goals 

Determine how much money you need in retirement and rigidly stick to the plan, taking into account your savings, investment strategy, spending goals and risk management approach. It will help you stay on course when potential cognitive biases are in play.

Use data and evidence 

Always base your decisions about retirement planning on cold, hard data and evidence rather than opinion and emotion.

Play the long game 

Don’t get swayed by short-term market fluctuations. Invest for the long term.

Employ automation 

Set up automatic transfers into your investment accounts to remove the need for frequent decision-making which is often vulnerable to cognitive biases, based around your current circumstances and market forces.

Diversify investments 

Split your investments across multiple asset classes, industries and international markets to reduce your risk and susceptibility to home biases.

Get advice today

The best way to ensure you are not being swayed by cognitive biases is to employ the services of an experienced and qualified financial adviser.

Most Australians work around 50 years for the right to enjoy their retirement so why would you risk getting it wrong?

Calder Wealth Management boasts a team of financial planners and advisers in Adelaide with a reputation second to none.

We can help you establish an investment plan or run a discerning set of eyes across what is already in place to ensure you remain on the right road to a happy and prosperous retirement.

We’ll also review your investments regularly to ensure they remain aligned with your goals, needs and changing circumstances.

We’ll adjust them if necessary to take advantage of evolving market conditions or your own life events.

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

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

Contact us today.

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.