The one major problem in doing retirement planning is the bias…oops Behavioral finance here too?

Well yes.

The human mind is not able to handle ambiguity – and Retirement planning is all about ambiguity. Take the case of going from Mumbai to say Delhi.

You know how much is the distance, how much is the speed of the plane, what time you will land….ALL THE FACTORS are known.

In retirement planning you have no clue how long will you live, how much should be your starting corpus, how much will you have to spend on some medical emergency which is not covered by medical insurance, spouse’s health…..etc. The human mind does not know how to handle all the variables. So what does the mind do? well, it just says “lets postpone retirement planning”.

The other problem is social. We now have evidence that people with friends who are fit are themselves fitter. In my recent vacation with a friend we were constantly wondering how to supplement protein in our diet because we were getting only carbs in both our lunch and dinner! This is not a typical vacation dialog right? So when people have to plan for retirement they ask their friends and cousins…and may not get any sensible or coherent answer, so they again feel secure that “none of my friends are worried about retirement, so I too will not bother”. Sad, but true.

Society knows that all of us will retire but NOBODY ever asks you “what have you done for retirement”. When you have a daughter many people will ask you “what are you doing for her marriage” or will ask you to buy gold for her marriage (I agree both are archaic ideas, but for want of a good example!!). So the importance of retirement planning does not sink in till your age of say 45…and by that time it is too late.

Then there is the great disposition effect. A few years ago -like 15 years ago- I bought a pension plan that had a premium of Rs. 10,000 per month – 80ccc. I know I should get rid of that piece of shit…but I am not doing it. I have shares of Crest Animation – bought for Rs. 10 and now worth Rs. 1…but my disposition effect bias is not letting me get rid of both these pieces of shit. This means my Retirement corpus is less to that extent. I know Jupiter Bioscience or Crest Animation are not going to come back to life…but sheer laziness / disposition effect is playing on my portfolio. Sure, it is a small amount, but you get the drift, don’t you?

Most retirement plans suffer from Endowment effect. Most senior citizens (I will take the liberty of saying age 70) would like to move to a new place, but are reluctant to sell off their property in good cities. They will come with all kinds of excuses – airport, hospital, children will not come to a smaller house, we are familiar with this place……and so will not downsize on the house. Nor will they say sell of in Santacruz and buy in Baroda.

More to follow….

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