Retirement reality check: Why overconfidence about your golden years can backfire

We always expect that there will be a time in the future when our lives will change dramatically. We will learn music, go on long holidays, learn to cook exotic cuisines, and begin to live a minimalistic life. We believe things will improve and we will become better versions of ourselves when some conditions are satisfied. Retirement is one such goalpost, when we expect completely different outcomes for ourselves and our families.
Scientists argue that our psychological well-being remains remarkably stable over time. However, it is common for people to believe that their future will be better than their past. This optimism bias is very well documented to be caused by hope, need for motivation, and self-esteem about how one steers one’s future to a better course.

Researchers have found this significant bias across large samples, and over both short and long periods of time. People recall events from their past with a mix of happiness and disappointment, but invariably describe their future very optimistically. People’s view of their future tends to be different from their own lived experience of the past, always more optimistic than their baselines.

Start preparing before retiringRetirement is an important milestone in anyone’s personal financial journey. The fears that are associated with the cessation of income, or the loss of power or purpose, should make one a little pessimistic about retirement. However, research has shown that most view retirement as a reward for the hard work of many years.

Coping tends to involve focusing on what one could not do earlier, but would, after retiring. It tends to begin with spending time with the spouse, taking care of oneself, making plans to spend time as one desires, and pursuing interests one could not find time for earlier.

Even those who do not imagine a very optimistic retirement, think of a change in their orientation and outlook. They resolve to be frugal and simple in their living, spend more time completing paperwork and documentation tasks, and focus on their health and well-being. The underlying assumption is that something new will happen and they will become someone else, hopefully for the better.

This optimism bias can set one up for disappointment. Research has repeatedly shown that nothing dramatic happens during retirement to modify one’s psychological frame of mind. Importantly, people do not suddenly become happier or sadder. How does one prepare for retirement taking into account the possibility of optimism bias at play?

First, if there is a new interest that you plan to pursue, ask whether you have devoted time, effort and resources towards that interest while you are still employed. If music is on your mind, do you take a few minutes, even if it’s once in a while, to do something about it— listen to your kind of music, attend concerts of your favourite musicians, discuss music with your family, or have people with a similar interest in your friend circle?

Second, if your retirement involves a completely new venture in which you plan to invest significantly, how well do you know this pursuit? Some of us plan to retire to the village and teach school children there. Some imagine living in a rural town or village on a farm, while others dream of a new business in textiles, fashion, food, etc. How do you see yourself equipped to do any of these? What plans have you made to learn and acquire these skills?

Conduct a ‘pre-mortem’

Third, Daniel Kahneman, the Nobel Prizewinning behavioural scientist, proposes an idea called ‘pre-mortem’. This involves imagining that whatever you plan to do in the future will fail. Then work backwards to see what might have caused the failure. This is proposed as an antidote to overconfidence and optimism bias. Do you lack the knowledge or skill to do what you have in mind? Does your plan need collaborators? Would you run out of working capital? This process helps you visualise in greater, realistic detail about how your plans may unfold.

Fourth, are there habits you have struggled to change and hope these will alter when you retire? If you procrastinate and struggle to prioritise your tasks, you may suffer a neurodivergent limitation that prevents you from doing the important tasks first. That won’t change because you have time on your hands and have retired. While you must be kind to yourself and not fall prey to playing a victim when things don’t work out for you, you should develop persistent habits that are tough to break and avoid being overconfident about suddenly becoming someone else.

Fifth, if your objective is to pursue something you have been fascinated with and see retirement as the time when you can focus your energies on it, you must ask why you have not done anything about it till now, even as you are working and a few years way from retiring. You won’t become minimalists overnight, nor will you fall in love with nature and work outdoors just like that. You may not be able to pick up your bags, go to a new place and enjoy it if you haven’t done it already. Your fascination may not be deep enough to stimulate action and testing it before retirement can save you disappointment.

Scarcity mindset may not last

Sixth, your attitude towards money might not alter just because you have retired. If you have lived with a scarcity mindset, worrying that you are not earning enough, you may carry it into retirement worrying that you don’t have enough savings. How you make your choices about money is a money personality you have acquired over years of earning, spending and saving, and it is unlikely to change suddenly. It might be better to know and be secure about how you deal with money matters than remain optimistic about correcting yourself for the better all of a sudden.

Many personal financial and lifetime processes are gradual, slow and acquired over time, as we gather experiences dealing with various life situations. We modify our positions as we fight, cope, respond, and work with situations that pan out differently from how we imagined them to be. We love control over our future, but being overtly optimistic about ourselves might come in the way of our readiness and response.

The author is chairperson,centre for investment education and learning