No matter how financially astute you have been in the past, when it comes to investing in retirement, rational thought seems to go out the window! As you take more responsibility for your financial planning and savings, the emotional element can impact whether you make good or bad decisions with your finances.
Your choices and the behaviours that influence these decisions can mean the difference between living in financial security and running out of money. Below are some of the behavioural aspects at play which affect your decision making process when it comes to retirement planning. By being aware of these instinctive behaviours, you can make more refined choices and avoid common pitfalls.
Behavioural Insight – #1 Interpretation of Information
When making financial decisions, most humans interpret information based on how it is presented, instead of relying on individual facts. In retirement, it is far better to move away from wealth accumulation and investment returns and instead, focus your retirement strategy on income generation. It is far easier to determine the dollar amount you will need to live in comfort than your investment’s growth percentage.
Behavioural Insight - #2 Through the looking glass
It is hard to imagine how the financial decisions you make today will affect your future wealth and lifestyle goals. By asking yourself what you want life to look like in 20 years, you are more likely to make the right choices to secure your financial future. In an experiment carried out by Professor Daniel G. Goldstein of theLondon Business School, individuals were asked to look into a mirror which showed them a reflection of what they might look like in the future. This group were asked to allocate virtual money towards their own hypothetical retirement account. Those that saw their ‘future selves’ were twice as likely to regularly fund their retirement pot, compared to those who only saw their current reflection.
Behavioural Insight – #3 Loss Aversion
Loss aversion means you fear the loss more than you value the gain. This is a common behaviour however loss aversion increases as you get older and can impact your financial decisions. Your fear of risk investment losses, steers you away from high growth funds that in reality is not as risky over the long-term.
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