Overconfidence Can Hurt Retirement Plans, Study Says
“Confidence is key”, we so often hear, whether it’s in terms of a relationship, job, or just day-to-day life. But can too much confidence ever be a bad thing? According to a new study, the answer is yes. Being overconfident in your financial ability might be more detrimental than helpful when it comes to planning for retirement.
A new study by the National Association of Retirement Plan Participants analyzed the differences between financial attitudes of 5,000 defined-contribution-plan participants and how those attitudes affected their actions. They found that when comparing perceived financial literacy and actual comprehension, a number of people didn’t match up. 20% of participants were overconfident and 23% were underconfident in their financial savvy.
Of those participants who were overconfident, certain trends persisted throughout their contribution plans that indicated the overconfidence actually has a negative impact.
Though the overconfident individuals were more zealous about their retirement plans, taking more steps to determine how much money they needed to put in and contacting their record keepers more often for guidance, the overzealousness doesn’t seem to pay off.
Although they went the extra mile in preparing to save, the overconfident individuals tended to put less of their paychecks towards saving for retirement. They also have smaller contribution plan balances than those who are underconfident.
These findings represent an interesting paradox in the retirement planning sector. Those who are overly confident about their ability to understand money and save adequately might actually be lagging behind when you look at the numbers. This makes it important to review your own retirement plan and determine whether you are in line with your needed savings goals or if you are just assuming you know what you’re doing but actually getting it wrong.
Women and Retirement Planning
In addition, the study revealed that men are better prepared than women. 53% of men have calculated how much money they need saved for retirement, while only 39% of women have done the same. On a similar note, 32% of men are confident they will have enough saved for retirement, but only 24% of women believe the same.
This repeats findings from other recent studies, which have found that men are usually more prepared for retirement. It is concerning, though, because retirement planning is actually more of a pressing issue for women than men.
Because women live, on average, longer than men and are more likely to need long term care in old age, planning for retirement should be a top priority. Women typically need more money saved to cover their health care costs because they have longer life spans and are more likely to be widowed when they need care.
Women make up about 70% of all long term care claims and 80% of all nursing home residents are women. This demonstrates a clear disparity in the system of long term care, where men are more likely to have their spouses as caregivers and women are much more likely to enter a facility.
When planning for retirement, it’s important to take into consideration your risk of needing long term care because it greatly affects how much money you need to save. Understanding your true financial ability is also crucial, as the study found that a misunderstanding can be dangerous to retirement funds. Read more about retirement planning trends or find out more about preparing for health care costs in retirement.