optimism bias
‘Overestimating the probability of positive events and underestimating the probability of negative events’
Generally we’re inclined to take a positive attitude to life. It helps us get through when things aren’t going our way. Usually, this is an effective coping mechanism, but it can lead to a bias that isn’t always helpful in retirement planning.
action
Clients need to be presented with the risks they face in retirement:
- Don’t take too much income. Nearly 40% of Australians have exhausted their pension pot by 75. In the US pension savings typically last 17 years.
- Retirement can last a long time. A 65 year old man has a 50% probability of living to 90. A woman has a 50% chance of living to 93.
- Don’t underestimate inflation. A £10,000 income 25 years ago would almost have to double in value to maintain the same purchasing value today.
- Retirement is an unforgiving environment. Sequence of returns risk can devastate a lifetime’s savings if poor returns occur early into retirement.