We remember the recent events that shape our lives while foregoing the events that could matter more. This is often called the recency bias or effect. And when it comes to retirement planning, the results are more likely to have long-term repercussions.
We are only Human
The recency effect of bias is well documented as a part of our human behavioral make-up. Given a large number of events, or even a grocery list recited over the phone, the average person will recall only the last few items. This bias has no boundaries affecting all sorts of recall scenarios. You may, on occasion, be able to recall a favorite moment from the past with great clarity. But in all likelihood, it will be the most recent occurrences that seem to matter more.
When it comes to retirement planning, this can be a negative influence. Let’s just consider the most recent past. In many instances, we recall how we felt when our portfolios and retirement accounts plunged in the fall of 2008. But we may not be able to explain why. Oh we may point to the mortgage crisis or bank bailouts or any number of financial mishaps that had occurred in what seemed to be a simultaneous fashion. All the while ignoring the real reason we got into trouble in the first place. (And even more curiously, why we are still in trouble.)
We had been suffering from a recency bias when it all began. We were only capable of looking back to the recent portfolio gains we had made leading up to those moments believing that no matter what happened, our recent success at investing was bound to continue. few of us thought diversification was as profitable as the all-in approach many of us had been taking. We had completely forgot that bear markets occur and do so with amazing speed.
Another Effect
And now we suffer from another effect of recency bias, moving too far to the conservative end of the spectrum as a result of those losses. If you were to turn on the business channels this morning you would probably think to yourself that the whole financial world was unwinding over the events happening in Europe, the role the US must play in it and how the stock markets are reacting to the news.
These events, although they seem to have great importance, have little to do with your retirement plan. They are too recent to have any long-term impact on what you are doing now for a point in the far-off distant future. In other words, the now (I’m referring of course to the news reports) or the most recent now has little to do with your retirement.
The now that does matter is based on several elements that we have discussed repeatedly. For instance:
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Have you focused on your debt? If you have you will understand that this takes some time to work on and in the process of doing so, you may realize how much (financial) energy it requires to fix. The impact of carrying debt forward, for some into retirement, is dramatic once your income becomes fixed.
Have you focused on your health? You might feel pretty good now but are you in the kind of shape you need to be in to experience the longer life scenarios currently being suggested. Folks are often worried about outliving their money. But approaching retirement in less than optimum shape might find the reverse to be closer to the truth.
Have you focused on balancing your financial interests? More than just a balanced and diversified portfolio, balanced financial interest requires you to examine a broad range of possibilities and sift the probabilities. Asking about the plan you have for mortgages, taxes, insurances and upkeep are also key to this balance. Understanding where your parents and your kids are financially might be more difficult but certainly not worth ignoring because it is somewhat harder.
A recent study about financial preparedness was conducted by MetLife. It found that, and not really surprisingly, “a third (35%) of the 45- to 49-year-olds feel prepared for retirement, while 64% of the 60- to 64-year-olds and 81% of 65- to 70-year-olds feel prepared”.
Ignoring the near-term and the short-term is not always easy. But it is essential in the retirement planning process. What the MetLife study suggests is that many people think that the time to chop firewood is when it gets cold outside, when in fact, the farther into the future you can think (you know it will get cold at some point), the better off you will be when it actually arrives. For the vast majority of us, this is our summer and early fall.
Not to belabor the analogy, but this is the time to chop the wood; not when the snow of retirement descends.
To download the MetLife study, go here.
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