Behaviors that can create roadblocks to smart financial choices

We should all have a plan to make sure we're financially prepared for a long, healthy, happy retirement. But we often give little thought to retirement planning. Many times we think of it as a challenging process — especially when there are many factors to consider. "How much money do I need to retire?" "What will my spending habits look like?" "How do I ensure my money will last as long as I do?" These concerns are certainly understandable, but could there be other reasons?

To find out why Americans don't always act in their best interests when planning for retirement, Athene (a major insurance company) commissioned a review of research by experts on consumer investment behavior from the UCLA Anderson School of Management. According to the research, many of us have biases that create roadblocks to investing — biases many of us don't even realize we have. Here are four common biases to be aware of as you plan and dream for your ideal retirement. Once you know these behavioral tendencies exist, you'll be on the path toward making smarter financial decisions:

We favor the simple solution.

When participants in a research study were asked to choose between two life-cycle funds with different levels of risk — one described in easy-to-understand language, the other in complex terms — the results were striking. The simply described funds were the preferred choice, regardless of the risk factor.1

We're unrealistically optimistic.

Research shows that most people think they're better-than-average drivers.2 Of course, not everyone can be above average! Optimism is great, but too much can cloud your judgment, especially regarding planning your financial future. People often underestimate the chance of bad things happening to them, such as major health care costs or losing a spouse.

We base decisions on recent and highly publicized events.

When asked which is deadlier, a shark or a cow, many people say shark. While shark attacks get more headlines, five times as many people are killed each year by cows than by sharks. People generally focus on top-of-mind events — whether that means a shark attack or a hot stock market. So they often base investment decisions on recent market performance, even though the recent past may not be a good indicator of the future.

We choose immediate gratification over future preparedness.

Given the choice between $500 today or $1,000 in five years, research shows many people would take the $500. The desire for immediate gratification can lead people to avoid sacrifices that could pay larger dividends in the future. For example, they may save less for retirement to hold on to more of their paychecks, even if it means forgoing free money offered by their employer from a 401(k) match.

A financial professional can provide an objective viewpoint to help you make smart financial choices and develop a plan for your retirement by:

• Clarifying your investment options in simple terms to help you choose wisely.

• Providing product solutions that can help financially protect you from life's unexpected twists and turns.

• Balancing your retirement strategy consistent with long-term market trends — protecting you from unpredictable short-term market downturns.

• Planning a smart retirement strategy considering all of your options — such as your employer 401(k) match, IRAs and annuities.

Many of us have some level of investment in the market — with many working-age adults choosing 401(k)s and IRAs to help save for the future. But when we experience market volatility, it may lead you to rethink how much risk you’re willing to take with your nest egg, especially if you’re in or nearing retirement.

Thinking differently about risk

It’s one thing to answer hypotheticals about saving and losing money when you’re planning for the future. But watching your 401(k) balance drop in market downturns sheds light on the real‑world implications. If experiencing market volatility has diminished your appetite for risk, now might be the right time to reassess your retirement savings plan.

What might your risk tolerance look like now? Take this quick quiz to help you gain a better understanding of what your risk tolerance and your expectations may be for the retirement products and solutions you choose.

Reducing your exposure to volatile markets and locking in some income guarantees may help you feel more confident about staying on track for the long term. Two strategies worth considering include:

1. Allocating more of your savings to fixed‑income options

2. Putting a portion of your portfolio in annuities

Finding comfort across the spectrum

Annuities are designed to help you achieve your retirement savings goals and provide future income. By helping insulate you from major financial risks like stock market losses or outliving your money, they could be part of a solution that helps you stay in your financial comfort zone. In this chart, you’ll see how different kinds of annuities are mapped along a risk spectrum. The left side of the spectrum is the most conservative. Anyone with the highest tolerance for risk may feel comfortable at the far right.

Diving deeper into annuity options

While all annuities are designed to provide income for retirement, there are different kinds to align with your accumulation goals and how much risk you’re comfortable taking.

• Immediate Annuity
  Carrying the lowest risk, immediate annuities convert your premium payment to a guaranteed income stream for life, or for a specific period.

• Fixed Annuity
  Fixed annuities offer a fixed interest rate that’s guaranteed for a certain time period. The guarantee may appeal to you if you’re willing to sacrifice the potential for higher returns if the markets rise.

• Fixed Indexed Annuity
  In the middle of the spectrum, fixed indexed annuities have become increasingly popular with people who have a moderate appetite for risk. You can earn interest credits based in part on the upward movement of a stock market index while enjoying the protection of a zero percent floor. If the net change in the index over a given crediting period is negative, you would earn zero interest credits for that period, but never less than zero.

• Registered Index-Linked Annuity
  These products are designed for people with a higher risk tolerance. Registered index-linked annuities offer the potential for index credits tied to index performance while providing a measure of protection from market loss.

• Variable Annuity
  This type carries the highest level of risk because your money is invested directly in the market. Variable annuities offer the highest growth potential of any of the products on the annuity spectrum, but they also leave you fully exposed to market loss.

Economic repercussions have led many people to rethink their appetite for risk and whether their financial strategy still meets their goals. This may be the time to talk with a financial professional about ways to help keep your retirement savings better protected, especially in the event of future downturns.

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