Following through with a retirement plan requires consistent action and a positive mindset over the long term to prevent common beliefs from coming in the way of objective decision-making. For instance, they could influence the choice of products when to invest, or the frequency of investments. That is why we must understand these Behavioural Aspects To Be Wary In Retirement Planning

For example, some people may stay invested in equity even after retirement; others who are young may go all out for fixed-income instruments, altogether avoiding growth assets in the portfolio, although they have time on their side, thereby limiting their chances for superior returns. Many of these decisions may have been influenced by common perceptions in the family and friend circles.

The PGIM India Mutual Fund Retirement Readiness Survey 2023, released recently, shows that many people rely on insurance agents instead of registered investment advisors (RIAs) for retirement planning advice. It can also impact the behavioral bias in investment choices.

Let us explore four common behavioral impediments and how to steer clear of them.

Extreme Caution 

Extreme caution can hinder decision-making, which in turn can adversely affect portfolio growth. This may be caused by people’s different experiences with money and is one of the behavioural aspects that be wary in retirement. Some may have faced financial difficulty, some may have been in a relatively better position, and others may be extremely wealthy. And all these experiences will impact their financial behavior differently. For example, those who have seen the global recession in the 80s may have the habit of saving and avoiding risks. Someone who has never experienced such difficulties would be more willing to spend and take risks. Risk-averse individuals who rely only on fixed-income instruments may lose the gains from growth assets. On the other hand, a diversified portfolio may have a better chance of generating inflation-beating returns. So, a lack of proper diversification due to extreme caution can lead to a reduced retirement corpus.

Economic Cycle

As retirement is inevitable for everyone, financial planning is essential. So, everyone should do retirement planning, and those who need help can go to financial planners. Generally, people with limited income do not consider investing or retirement planning. And those who invest generally seek advice from friends, family, social media, etc.

Historically, people invest in equities when the market is high, expecting the positive trend to continue, and withdraw when there is a correction without understanding how the market cycles work or the risks involved. The right thing to do would have been to enter at a low and exit at a high. Nobody can predict the future, so they should stick to their financial plans and not be bothered by temporary market swings. They can also take expert advice instead of making a wrong move.

Fear Of Missing Out (FOMO)

There are a plethora of investment options available in the market. As the market evolves, there are more complex investment instruments. There are also many other fixed-return instruments than just bank FDs. For instance, gold offers high liquidity, capital appreciation and tax benefits. One can also get equity exposure through exchange-traded funds (ETFs) and mutual funds. Cryptocurrency is the newest and most complex investment instrument. But many went for it without knowing it first.

The fear of being left out can harm or disrupt your retirement planning as is one of the very important behavioural aspects. So, think long-term and consult experts instead of falling for FOMO. Many psychological and external factors impact our choices. And that’s why good times raise hope, and difficult times generate negative thoughts. Beware of these impulses to make the right choice.