Slideshows | June 18, 2014

Five important thinking traps that should worry retirement savers

Saving for retirement is an important long-term financial goal for many people.

Reasons for saving for retirement vary: it might be about the dream of retiring early – or of finding an ideal job you are happy to work in even after you pass the state retirement age. Different people will have different aspirations, but there are many thinking traps that can get in the way. We look at five – including procrastination, peer pressure and the bias towards investing in home markets.

Now, the dos
The slideshow highlights some thinking traps to avoid, but it is important to explain some steps that can help as well. The first is start early. Seven tips for pension planning lays out numbers to demonstrate this principle. It tells how a 30-year-old saving €1,000 a year into a pension (with 5% annual interest) will accumulate €71,000 by age 60, if the savings are left untouched. In comparison, a person who waits until 45 to start has to put aside €3,000 a year (under the same investment conditions) to accumulate the same amount by the time they turn 60.

The second is to embrace the "lifecycle" approach to investing. The style centres on the idea that investments are tailored to particular stages in an investor's life. Importantly, investors reduce exposure to riskier investments (such as shares) towards less risky assets (such as government bonds and cash) as they get closer to their desired retirement age.

 

1

Safe at home?

Investing retirement savings entirely at home can give a false sense of security. This home equity bias can reduce diversification, concentrating risk in one place (investment type, industry or other factor).

2

I want it now

It's easy to enjoy a holiday now, perhaps at the expense of a more comfortable retirement. This can be about hyperbolic discounting: people typically consider consequences less if they're a long way into the future.

3

I didn’t choose to save

The default option is what you get when you don’t make a choice. If the default is having to opt into retirement savings (rather than being automatically enrolled), it might lead to trouble later in life.

4

Can’t it wait?

Procrastination is one of the main problems associated with saving – and saving for retirement is no exception. It is the tendency to “put off” a task. For financial planning, it can be costly.

5

“Keeping up with the Joneses”

Peer pressure is not always intentional; it might just be a sense that we want to have a new car because our neighbours do or dine at a new, expensive restaurant because our friends have. If it eats away at  long-term goals, shut out peer pressure to stay focused on retirement hopes.

SavingRetirementPeer effectsProcrastination

eZonomics team
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