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Don't Step Into These Saving Traps Some behavioral biases seem tailor-made to foil retirement savers. But their ill effects are smaller for those who are aware of them.

Most of us are aware that a sneaky set of psychological biases can trip us up when it comes to investing and managing our money. And some of these biases seem tailor-made to foil retirement savers. Prudential Retirement, an arm of the insurance giant that administers 401(k) plans, surveyed plan participants in 2017 to see which behavioral challenges troubled them the most. Here’s what the survey found.

Longevity disconnect. Although no one is eager to meet the Grim Reaper, a lot of us think we’re not going to live as long as we probably will. That’s a problem when you’re funding a longer-than-expected retirement. For 39% of those taking Prudential’s quiz, failing to see far enough into their senior years posed the biggest behavioral challenge to achieving financial security. Counteract this bias by picturing an older version of yourself. Apps such as FaceApp can help.

Procrastination. More than one-fourth of the savers quizzed turned out to be put-it-off-until-later types. But when it comes to investing, squandering time is a huge mistake, just as the opposite, investing early and often, can work magic—the magic of compound returns. Programs that enroll employees automatically in retirement savings plans are a boon for procrastinators; many plans let you escalate contributions automatically, too.

Optimism. Some 22% of savers suffered most from rose-colored-glasses syndrome. Believing that everything will all work out in the end may be good for your blood pressure, but it’s not an efficient savings strategy. Plan for inevitable bumps in the road, which can range from the catastrophic—being struck by serious illness, for example—to the merely disappointing—say, a missed promotion.

Following the crowd. Determining the best investment mix for your stage in life and your risk tolerance is a challenge. Sticking to the plan when the market is volatile requires fortitude. Prudential found that 8% of savers were most led astray by being herd-followers. Regular portfolio rebalancing can keep your assets on target; a written investment policy can help you stick to your guns.

Instant gratification. Would you wait a year for $1,000 rather than receive $500 today? How are you with impulse spending? Most people who took Prudential’s quiz said that waiting, either for a higher return or to make a purchase, wasn’t a big deal; only 5% revealed it as their major issue. But research published by the National Bureau of Economic Research in 2016 found that more than half (55%) of retirement savers suffered from “present bias”—a wonky term for wanting instant gratification. If you need a nudge, try a budgeting app or a commitment to cash-only spending to curb purchases you’ll regret.

The NBER research found another foible that keeps people from saving as much as they should: Nearly seven in 10 retirement savers misunderstood how account balances increase over time, underestimating the exponential growth of compound returns and, therefore, investing less than they otherwise would. In other words, a lot of people aren’t saving enough because they simply don’t realize how much money they’re leaving on the table.

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Copyright © 2018 RSW Publishing. All rights reserved.

Distributed by Financial Media Exchange.Article By Anne Kates Smith, Senior Editor
From Kiplinger's Personal Finance, February 2018

RSW Publishing has an agreement to republish this author’s content.