Investing with confidence

When it comes to investing for a comfortable retirement, could you be your own worst enemy? Here’s how your unconscious fears and biases could impact your financial decision-making – and what you can do to keep them in control.

When you’re thinking about the financial risks you may face in retirement, what do you take into account? If you’re like most people, you might consider market volatility, inflation and the risk of outliving your savings.

But have you also considered the risks that can arise from your own behavioural biases?

Being aware of unconscious bias

There are several unconscious biases that could impact the financial decisions you make when preparing for retirement. One of the most important is hyper-loss aversion.

Hyper-loss aversion stems from the pain of a financial loss being felt more keenly than the joy that is felt from financial gain. It can result in investors making rash and ill-considered decisions to avoid the pain of losing money – such as consolidating losses by selling shares and moving money into cash.

This type of behaviour is more common during challenging economic periods, like the Global Financial Crisis and COVID-19. In fact, during the first quarter of 2020, investors pulled money from every asset class in their portfolio, except for cash1.

The irony is that investing solely in cash may in fact cause the scenario feared most by retirees: running out of money during their lifetime. Research has shown that 61% of retirees fear running out of money more than death itself2.

With cash-only investments failing to keep up with inflation, retirees are forced to draw on and potentially deplete all their retirement income.

So why the fear?

No two retirees are the same, but we all share the common goal of wanting enough money to live comfortably in our golden years. But research shows that around 60% of Australians aged between 50 and 70 are concerned that their savings won’t last the distance.3

One of the reasons behind this concern is that on average, Australians are living longer than ever before. For example, in 1960 the average life expectancy of a 65-year-old man was 77.5, and for an Australian woman it was 81. Fast forward to now and that life expectancy has increased to 85 for men and almost 88 for women4. This means that if you’ve just turned 65 and are about to retire, you’ll need your retirement savings to last at least 20 years – potentially more.

Another concern among retirees is that a share market downturn will impact savings close to or during retirement – when there’s less time for investments to recover before they start drawing down on their value. Because any fall in the returns generated by a market crash increase the amount of capital they may need to eat into, it can reduce the growth potential of the entire portfolio, reducing its ability to last for the long term.

The downside of backing a sure thing

Despite this, many retirees make the move to cash in times of trouble – choosing short-term certainty over long-term gain.

When it comes to money, many people would simply rather take the safer, more familiar route. This can lead to missed opportunities for potential financial gain, and ultimately a retirement portfolio that may be exhausted far too early.

What you can do

When fears arise, it can be helpful to have an expert by your side. Your financial adviser can provide an objective view of the situation – and help you understand the pros and cons of decisions you make.

Your adviser can also provide you with access to protective strategies and can suggest tools or products that are specifically designed for retirees or near-retirees. This can give you peace of mind about what your future looks like so you can look forward to retirement with confidence.

Source: Allianz

1 Allianz Retire+, Investfit projections, March 2020.

2 Allianz Life, Reclaiming The Future Study, 2010.

3 National Seniors Australia, Feeling financially comfortable, 2019

4 Australian Institute of Health and Welfare, Deaths in Australia: Life Expectancy, 2020.