Retirement Planning and Planning Fallacy Bias
Introduction
As retirement approaches, many individuals begin setting long-term financial goals to secure their future and ensure a comfortable lifestyle. However, much like New Year’s resolutions, these goals are often set with unrealistic expectations, and retirement planning is no exception to this common mistake.
While it’s important to look forward and prepare for retirement, relying too heavily on overly optimistic projections can lead to poor financial decisions. This tendency to underestimate the time, effort, and costs involved is known as the planning fallacy bias, where individuals base their retirement plans on overly hopeful outcomes, often overlooking potential setbacks and challenges.
What is the Planning Fallacy?
Planning fallacy is the tendency to be too optimistic about one’s estimates; hence, leading to an underestimation of the time needed to accomplish a goal.
Case Study:
Singapore Scenario
Recent studies from the SMU Centre for Research on Successful Ageing (ROSA) and Manulife’s 2023 survey both highlight retirement planning as a significant concern for Singaporeans. ROSA’s research shows that only 34% of Singaporeans feel well-prepared for retirement, and 27% have no retirement plan at all. Similarly, the Manulife survey found that while 63% of respondents rank saving for retirement as their top financial goal, only 35% have an actual retirement plan in place. Many individuals, particularly younger couples, face competing financial obligations such as housing, family planning, and rising costs of living, which hinder their ability to focus on long-term retirement savings. Inflation and job security further add to the struggle, making financial stability a key concern for those preparing for retirement.
Additionally, healthcare expenses are a growing concern, with nearly half of Singaporeans worried about affording medical treatment in old age, further emphasizing the need for comprehensive retirement planning.
Key Takeaways: Studies from SMU and Manulife show that many Singaporeans are unprepared for retirement. Competing financial obligations, inflation, job security, and healthcare costs make retirement planning a pressing concern.
Risk Management Strategies
1. Educate on different retirement strategies
- Understanding these strategies encourages long-term thinking by accounting for unpredictable factors like market volatility, health expenses, and inflation, helping individuals stay grounded in their financial assumptions and make more informed, rational decisions about their retirement.
2. Stress need for early, consistent saving
- To ensure that the planning fallacy does not lead to delayed financial security and retirement, it is important that Singaporeans start to save money early on and set savings aside to anticipate for their future instead of spending all disposable income. Savings should also be consistent where a proportion of income should be set aside to prepare for the future. This sort of early and consistent practice will counteract any planning fallacies and lead to healthy savings and financial health.
3. Be realistic
- The planning fallacy often causes people to underestimate how much they need to save for retirement, thinking they can catch up later or that they’ll need less than they actually will. A realistic approach, however, pushes people to consider their actual savings progress and current financial habits. This encourages higher savings rates and proactive measures, like adjusting contributions earlier, rather than relying on last-minute catch-up strategies that may fall short.
Retirement Instruments:
1. CPF
In Singapore, the Central Provident Fund (CPF) is a mandatory, government-managed retirement savings scheme. It functions as a social security system, enabling Singaporeans to allocate funds for retirement, healthcare, and housing needs. Both employees and employers contribute to CPF, with the savings invested in a variety of approved financial instruments to generate returns.
2. SRS
The SRS is part of Singapore’s multi-faceted approach to addressing the financial needs of an aging population by encouraging Singaporeans to save more for their retirement. Launched in 2001, the SRS is operated by the private sector and works alongside the Central Provident Fund (CPF). While CPF savings are intended to cover housing, medical expenses, and basic living needs after retirement, participation in the SRS is voluntary. SRS members have the flexibility to contribute varying amounts (up to a capped limit) at their discretion, and the contributions can be invested in a wide range of financial instruments.
3. LBS
The Lease Buyback Scheme (LBS) allows homeowners to sell a portion of their flat’s lease back to the government. The proceeds from this sale are used to top up the homeowner’s CPF Retirement Account, which in turn provides a steady income through CPF LIFE. Despite selling part of the lease, homeowners can continue residing in their flat throughout their retirement.
4. SHB
The Silver Housing Bonus (SHB) is a program introduced by the Singapore government to encourage senior citizens to downsize their homes. This scheme helps elderly Singaporeans increase their retirement savings by moving from a larger residence to a smaller, more affordable one.
Eligible individuals selling their current flat or private property with an Annu