Retirement Planning Through A Behavioural Lens

When people think about retirement, financial products and numbers usually come to mind. However, money is only one part of the story. How we think, feel and act plays a major role in shaping our financial future.

Behavioural finance retirement studies show that small biases in our decision-making can hold us back from saving enough. But, once we recognise these patterns, we can take steps to work around them.

Let’s take a closer look at retirement planning through a behavioural lens, highlighting common barriers, and some simple ways to build favourable saving behaviour.

Table of contents

• Common behavioural barriers to retirement saving
• Impact of procrastination, hyperbolic discounting, and status quo bias
• Importance of starting early and the power of compounding
• Behavioural tools: Defaults, automation, reframing
• Steps to boost retirement readiness

Common behavioural barriers to retirement saving

Even when people know that saving is important, they often delay it for some of these reasons:

• Present bias: Preferring immediate comfort over future security.
• Overconfidence: Assuming we will earn more later and can “catch up” with savings.
• Mental accounting: Putting money in different “buckets”, sometimes spending freely while ignoring long-term goals.
• Inertia: Avoiding decisions because they feel complex or overwhelming.

These barriers do not imply carelessness. They simply indicate how the human mind tends to work and how psychology is a big part of financial decisions.

Also Read: Retirement Savings Rule

Impact of procrastination, hyperbolic discounting, and status quo bias

Three specific behavioural tendencies may affect retirement planning in significant ways:

• Procrastination: Many people delay opening a retirement account or starting an SIP for retirement, believing they can begin later. The delay can reduce the total wealth that could have been built.
• Hyperbolic discounting: We may give higher value to immediate rewards, like a holiday or a new gadget, compared to distant needs such as retirement. This can make it harder to save steadily.
• Status quo bias: People tend to stick with the current situation, even if it is not the most favourable one. This may mean keeping money idle in a savings account instead of exploring investment options.

Understanding these tendencies helps us see why good intentions do not always lead to action.

Importance of starting early and the power of compounding

One of the most practical early retirement tips is to start saving as soon as possible. The reason for that is compounding. Compounding happens when potential returns on your investment are reinvested and may generate further returns. This can potentially lead to accelerated growth over longer periods.

A small amount invested early has more years to potentially grow compared to a larger amount invested later. For example, starting an SIP for retirement in your 20s, even with a smaller sum, may potentially build more wealth than starting with a bigger amount in your 40s. The difference is simply the longer runway for opportunities for compounding.

Behavioural tools: Defaults, automation, reframing

Because we may not be naturally inclined to save for retirement, we can use some behavioural tools to make the process easier:

• Defaults: If an employer automatically enrolls staff into a retirement savings plan, more people tend to stick with it. Having a default option reduces the need for fresh decisions. However, investors should periodically review these defaults to ensure alignment with their changing financial goals and risk tolerance.
• Automation: Setting up automatic transfers or SIPs ensures savings happen regularly without depending on willpower.
• Reframing: Looking at savings not as a “loss” of current spending but as “future income” may help people stay motivated. For instance, imagining an SIP as “paying your future self” can change how you feel about it.

These tools use simple design choices to guide behaviour without limiting freedom.

Steps to boost retirement readiness

Some practical steps to consider while building your retirement plan:

• Start small but stay regular: Small contributions can make a big difference if they are consistent.
• Use SIP for retirement: SIPs can help average out market ups and downs and build discipline.
• Increase contributions over time: Whenever income rises, set aside a little extra for retirement.
• Set clear goals: Having a sense of how much you may need in retirement makes the task less vague.
• Keep reviewing: Check your retirement portfolio annually, or following significant life events (marriage, children, job changes) or major market movements, to ensure your strategy remains suitable.

Also Read: Busting Common Retirement Planning Myths

Conclusion

Retirement planning isn’t simply about choosing a suitable avenue or chasing returns. Much depends on how we deal with procrastination and make small daily choices. Behavioural finance retirement research reminds us that our mind often prefers the present over the future, but with awareness and some simple tools, we can make saving easier. By starting early, using automation and the power of compounding, and reframing how we view savings, we may work towards potential financial security in retirement years.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe, which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.

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