Overconfidence: a help or hindrance?
Most people think they're better-than-average drivers. Of course, not everyone can be above average. Optimism is great, but too much can cloud people's judgment, especially when it comes to planning their financial futures.
Viewing the world in positive terms and being optimistic can be extremely valuable as we navigate through life. However, when that view of one's own abilities begins to skew toward unrealistic, it can cause a bias that affects decision-making and overall behavior.
This bias is known as overconfidence and is often linked to the issue of control and believing we can avoid negative things from happening to us. Some individuals also attribute a positive outcome following a decision to their ability and skills and a negative outcome to simple bad luck. When it comes to a retirement planning discussion, self-assured clients can present both a challenge and an opportunity.
Overconfidence in retirement planning
You may have encountered the overconfident client who overlooks potential risks, underestimates the time spent in retirement and misjudges how long his or her income will last. When clients refuse to see the bigger picture through a realistic lens, it can be challenging to convince them of the importance and value of long-term planning. However, if you understand this bias and its effects, it's possible to reduce its influence and find ways to work around it to help your clients achieve their financial goals.
One way to help your clients overcome this bias is by encouraging them to: be realistic about their financial futures.
Just like with any prospective client, building trust is essential to forming a sound relationship with individuals who may have an overconfident view of their financial situation. You must be your clients' financial compass by not only creating awareness of potential risks to their retirement savings, but also by sharing the facts and making an emotional connection between those facts, their retirement lifestyle and their loved ones.
For instance, more than half of retirees retired before they planned, with the most common reason being health problems.1 Illness can occur at any time and affect how we envisioned our future to be, including lengthening the time spent in retirement and requiring savings to stretch farther than anticipated. Additionally, almost half of retirees said their health care costs were higher than expected, and just over a third said their non-health care expenses were more than they predicted.2 It's important to explain that while no one can avoid retirement risks, careful planning can help mitigate them.
Addressing annuity uncertainty
In looking specifically at annuities, some clients may think these retirement vehicles are not needed and their alternative investments or saving strategies can offer the necessary income to maintain their quality of life throughout retirement. Discussing the facts about an annuity, including both benefits and limitations, may help your more resistant clients to connect with what annuities are and what they can do to supplement a retirement portfolio. Showing how annuities provide guaranteed lifetime income, tax deferral opportunity and the ability to leave a legacy for loved ones can help make the connection between financial facts and retirement lifestyle goals.
When discussing annuities, keep the overconfidence bias in mind and customize your conversation to appeal to clients with this common tendency. Right from the start, you can reveal any retirement planning blind spots and overcome objections to find the opportunities.
While overconfidence can undermine the success of a long-term financial plan, clients who are secure in their decisions will likely be satisfied customers. You must find a balance between an optimistic yet realistic approach to enhance your clients' appreciation for the value protection and predictability can provide.
Overconfidence is just one of 10 biases that can create roadblocks to smarter financial decision-making. Athene commissioned a review of biases from two experts in judgment and decision making at UCLA Anderson's School of Management which uncovered these behavioral tendencies and provided solutions to help overcome them. Download the extensive whitepaper — Solving the Annuity Puzzle: A behavioral analysis — or read the articles below to discover more details about these biases to help put you and your clients on the path toward making smarter financial decisions together.
This information is brought to you by Athene — where innovative annuity solutions are powered by unconventional thinking.
1 The Retirement Income Reference Book. Fourth Edition. LIMRA Secure Retirement Institute Research. 2018. Page 70.
2 2018 Retirement Confidence Survey. Employee Benefit Research Institute. April 24, 2018. Page 18.