The brain is a powerful thing, but when it comes to preparing for something that is far in the distance like retirement, it can easily be led astray — and result in some big retirement planning mistakes. Avoid preconceived notions and assumptions like waiting to save for retirement or keeping the status quo to protect your nest egg for the retirement you deserve.
UNDERSTAND THE TRUE COST OF WAITING
One bias that can have a huge impact on the amount you save for retirement is hyperbolic discounting, which is our human tendency to choose the smaller-but-sooner reward over the larger, more distant prize. Everyone has bills to pay, vacations to plan and big-ticket items they want to purchase now, which can lead the bias to kick in and push retirement — much farther in the future than that trip to the beach — to the back burner. But the earlier you start saving, the more money you will potentially have once you reach retirement.
MIND YOUR ASSET ALLOCATION
Have you ever gotten stuck on the idea that what’s good enough now is good enough forever? Then you’re an unfortunate victim of the status quo bias, which, when you’re planning your retirement, can lead you to skip rebalancing your investment portfolio. A sound investment plan is going to have your investment dollars allocated in stocks and bonds based on your risk tolerance and time horizon. If you “set it and forget it,” with respect to your allocation, you may end up being overweight in stocks and underweight in bonds.
AVOID MYOPIC FRAMING
At the same time, you need to be careful not to look too closely at your investments with myopic framing. The stock markets can be tumultuous, and can cause a lot of fear and stress if you watch your investments daily. Stocks can fall dramatically in a day, but that doesn’t mean they will stay down forever or even next month. By avoiding checking on your holdings too often, you may potentially avoid making poor investment decisions like selling low and buying high.
KEEP YOUR BIASES IN CHECK
Will you achieve your retirement dreams? You may potentially improve your odds by staying aware of your cognitive biases. Waiting too long to save, not paying attention to your investment plan and not seeing the forest for the trees are all ways to get you — and your retirement — in trouble.
Human nature, biases and assumptions can make it challenging to prepare for retirement. In an environment where news is flowing every day — if not hour — and everyone having their own idea of what you should be doing, staying focused on your long-term goals can be tough. Financial professionals who are trained to spot financial biases and potential problems can help keep you focused on the end game: Having enough money to live comfortably in retirement.
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2020-112693 Exp. 11/22