Are You Procrastinating On Creating Your Retirement Plan?

I have an important question for you: Are you procrastinating on creating or finalizing your retirement plan?

Life is certainly busy and throws a lot your way. We rush to and from work. There’s always something to clean up or fix around the house. Errands are constantly pulling at us. And, don’t forget about those bills to pay!

So when should you carve out the time to get your retirement plan in place? Is there really any harm in waiting? You may be surprised by the answer! Join me as we analyze these important questions and more.

The Harm in Waiting to Plan

One of the most common issues I’ve seen as a financial advisor are people who have failed to plan. I see this in so many different aspects and dimensions:

• Not having enough saved for retirement
• Taking far too much risk when nearing your retirement
• Having lost money in a recent market correction and having to push back retirement
• Financial projections that show money running out far too soon
• And many more examples!

There was a recent research study that asked retirees what things they wished they had done differently now that they were in retirement. The answers were very enlightening. Many people said they wished they had spent less on cars or expensive purchases earlier in their lives. Many of them wished they had started to plan sooner. Others said that they should have worked longer, instead of retiring earlier. Nearly all of these answers had to do with people feeling they didn’t have enough money once they were well-established in their retirement years!

What’s interesting to me is that so many of these responses all go back to one key point—what did your retirement plan (before you retired) suggest that you do? Unfortunately, the vast majority of people have no retirement plan in place and never create one. Thus, naturally, there are no answers to glean from this non-existent plan.

So why is this the case? Why do people wait and procrastinate on getting a financial plan in place? I think the answer lies in what behavioral finance calls “Optimism Bias.”

What is Optimism Bias & Why Does it Matter?

Optimism Bias is defined as “a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. It is also known as unrealistic optimism or comparative optimism. Optimism bias is common and transcends gender, ethnicity, nationality and age.”

When it comes to your retirement planning, Optimism Bias is one of the most dangerous risks that you can face. Here’s how this sneaky behavioral tendency can manifest itself in your thinking and mindset. Do any of these internal lines of thinking resonate with you?

• “I’m planning on working a few more years, so I’ve got time to figure all this out and
  save more.”
• “Even if I do lose some money in the markets, I can always cut back.”
• “The markets have done pretty well so far this year. I should ride this out before I
  make any changes.”
• “I ran some basic financial projections and it looks like I’ll be OK if I keep things as is.”
• “I’ve weathered other financial crashes before (like 2008), I’m sure I can weather the
  next one.”
• “Even though I just lost 15%, I’m sure it will come back soon.”
• “My current advisor says that I’ve got a pretty high likelihood of not running out
  of money.”

Do you see the recurring trend here? For many people, their minds tend to always put a positive spin on things. And, while it’s great to be an optimist, it can be potentially devastating when it comes to your finances. Because your mind tends to think you’ll be fine or figure everything out, it convinces you that it’s OK to wait to update or improve your retirement plan. Or, it tells you to just “stay the course” and hope that everything will turn out alright.

This can be further compounded by other behavioral finance biases, such as “I know I should make a change, but I really like my current advisor and don’t want to hurt his feelings” (i.e. being too nice to others to the detriment of yourself), or recency bias—thinking things like “the market is up 15% this year, I’m doing good!” even though you just lost 20% last year and are actually behind.

But of all the behavioral finance risks, Optimism Bias tends to be the most prevalent and one of the hardest ones to spot and assess. After all, its hard to convince yourself that it’s a bad thing to be optimistic, right? Nobody wants to be a negative Nancy!

So, what can you do about all this? Let’s take a look.

Assessing Your Own Thinking  & Understanding the Consequences

As you read the hypothetical “thoughts” I listed above, did you relate to any of them? Do you say things that are similar in nature or put a positive spin on your own thoughts? The first step is to be self-aware and to assess the thoughts and feelings that you have running through your head.

The next step is a bit harder. I want you to consider the ramifications of these thoughts if your positive thinking is incorrect. For example, let’s take a few of the lines I used above and see what the negative consequences might be if we were incorrect in our thinking.

• “I’m planning on working a few more years, so I’ve got time to figure all this out and
  save more.”
  Far too often, people think this, but then they don’t save much (or anything at all) without the guidance and discipline of an advisor and a well-crafted retirement plan. Whether it’s due to not knowing how much you need to save, or again, Optimism Bias, thinking that what you are saving is enough, you’ve got a lot of risk here if you realize too late that you have insufficient savings. Will you have to work more? Postpone retirement? Cut back on your traveling and dreams in retirement? What other consequences might you face?
• “Even if I do lose some money in the markets, I can always cut back.”
  This is a big one. Many people just assume that, at some indefinite point in the future, if they realize that they aren’t OK, they will just cut back. But, this is very shortsighted. Most people, when presented with the reality that they have to cut back, never want to and can become very depressed or unhappy if they realize that they must. The truth is, you will never want to cut back and will have a very hard time doing so, whether it is today or in the future. Here’s the best way to understand this. Imagine that, today, you had to cut back 15% or 20% of your expenses. Where and how would you do that? It would be hard right, if not impossible? Well, that’s the same level of difficulty that you will face with this decision in retirement!

• “The markets have done pretty well so far this year. I should ride this out before I make
  any changes.”
  This line of thinking can be dangerous. We’ve all heard the golden rule of the stock market: Past performance is no indication of future results. Yet, we consistently ignore it. It’s so easy to get sucked into the emotional cycle of the markets, where individual investors almost always under perform. For example, if the market starts to get shaky, will you sell? How do you know it’s the right time? Nobody wants to sell and miss out on the gain, so they hold on. Inevitably, the market then corrects, but people still don’t sell because they don’t know it is a correction until after they’ve lost a lot of money. Then, they finally get fed up and sell when they’ve “had enough” losses. The result? You sold at the bottom, not the top. The exact opposite of what you should have done!

As you can see, there are consequences to positive thinking and emotions. The goal of a good advisor and a good retirement plan is to help ensure that you avoid making these kinds of mistakes that can truly impact you in your retirement years.

Is it Time to Get Your Retirement Plan in Place?

If you’ve caught yourself procrastinating on finalizing your retirement plan, whether due to Optimism Bias or any other reason, now is the right time to get your plan put in place. Our clients report much higher levels of confidence, satisfaction and security once they know they’ve got their retirement plan on track, in place, and secured.

If you’re ready to get started on your retirement planning, give us a call today. We’d love to spend some time together and see how we can help!