Retirement: Savings Traps That Foil Retirement Savers

Most of us are aware that a sneaky set of psychological biases can trip us up when it comes to investing and managing 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 last year 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 percent 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 a quarter of 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 percent 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 a missed promotion to a serious illness.

FOLLOWING THE CROWD

Determining the best investment mix for your stage in life and risk tolerance is a challenge. Sticking to the plan when the market is volatile requires fortitude. Prudential found that 8 percent 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 percent revealed it as their major issue. But research published by the National Bureau of Economic Research (NBER) in 2016 found that 55 percent 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.

Some good news about these sneaky biases, according to the NBER: Their ill effects are smaller for those who are aware of them.

Anne Kates Smith is executive editor at Kiplinger’s Personal Finance magazine.