The mind games you play with yourself now can cost you big in retirement (via CGolladayCS)
The human mind is an amazing thing, but it’s certainly not infallible. Sometimes assumptions, misconceptions and biases shape our decisions in ways that run counter to our best interests.
A recent survey of 401 participants found that a third of those who were auto-enrolled in their employer’s 401 plan have never increased their savings rate. You’d be wise to follow the example of the 47% of total respondents who have gradually increased their contribution level in the past two years.
Thinking about this concept in terms of retirement can remind all of us how important it is to regularly monitor our 401 plans to make sure they still align with our financial targets. According to that same survey, a large portion of those who were auto-enrolled into their 401 plan have never changed their investment choices, showing the power of the status quo bias.
Round number bias A third stumbling block is people’s natural preference for round numbers. This bias shows up in retirement planning because people often choose 401 savings rates in multiples of 5%, which might keep them from making smaller increases at more regular intervals. For example, you might be at 5% now, but don’t stay there because you can’t afford to go to 10%. Even a bump from 5% to 6% is an improvement, and every little bit helps.
An effective way to overcome this bias — as silly as it might seem at first blush — is to imagine your future self and then ask your present self what you are doing for him or her. In terms of concrete next steps, you can make it a priority to learn about your 401 plan’s options.
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