The Hidden Risk Lurking in Most Retirement Plans: Human Behavior
Every good retirement plan accounts for market volatility, inflation and longevity. But the biggest threat to retirement success is one that is often overlooked: human behavior.
Whether it’s fear during a market downturn or greed during a furious rally, investors routinely undermine their own long-term interests by reacting emotionally to short-term noise.
Health shocks or unexpected medical expenses can trigger similar emotionally driven missteps, causing retirees to make reactive financial decisions at precisely the wrong time.
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Financial advisers have long recognized these patterns, but only in the past decade has the field of behavioral finance moved from academic theory to practical retirement application.
The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.
Today, the difference between a good retirement adviser and a great one often comes down to behavioral guidance.
What is the ‘behavior gap’?
The “behavior gap” is a concept drawn directly from behavioral finance. It describes the difference between the returns an investment strategy should deliver and the typically lower returns that investors actually receive due to their own behavioral mistakes.
For example, according to Dalbar’s Quantitative Analysis of Investor Behavior, the average equity fund investor has underperformed the S&P 500 by several hundred basis points annually for the past 30 years, largely due to fear-based selling and return-chasing behavior.
Even experienced investors are vulnerable to decision-making errors fueled by cognitive and behavioral biases such as:
- Recency. The tendency to place too much weight on recent events or market performance, often at the expense of long-term perspective.
- Loss aversion. The tendency to feel the pain of losses more intensely than the pleasure of equivalent gains, which can lead to overly conservative decisions or panic selling.
- Confirmation bias. The tendency to seek out or interpret information in a way that supports existing beliefs, while disregarding contradictory evidence.
These patterns are present across income levels and account types, including financially literate clients, and education alone is rarely enough to overcome them.
Lasting change requires behavioral coaching and consistent guidance. This includes during periods of market volatility, but also when emotionally laden decisions about spending, withdrawals, health care and other life transitions must be made.
Behavior becomes riskier near retirement
The years just before and after retirement, sometimes referred to as the “fragile decade,” are a particularly risky time for such emotional decision-making.
Retirees are facing new uncertainties. No longer accumulating wealth, they must begin drawing down assets, which introduces a powerful new stressor: decumulation anxiety.
This anxiety stems from fears of depleting savings too quickly, uncertainty about how long retirement will last and the loss of a steady paycheck that once provided financial security.
This is where the stakes get higher. Even the most well-prepared retirees can unravel their plans during volatile markets, or when facing issues like tax changes, health care expenses or evolving family needs.
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These moments of heightened emotion can lead to extreme behaviors, with overly conservative decisions or panic-driven actions potentially jeopardizing a well-structured retirement plan.
It’s why many financial advisers are now seeking specialized education, like the Retirement Management Advisor® (RMA®) certification, to strengthen their ability to guide clients through decumulation with technical precision and deep behavioral insights.
Fear of market losses in action
One recent example of how emotions shape financial decisions comes from Schroders 2025 U.S. Retirement Survey, which found nearly a quarter of plan participants allocate significant retirement assets to cash, and more than half of those cite fear of market losses as the reason.
While the comfort of cash is understandable, it also carries the opportunity cost of a portfolio’s growth potential, undermining financial well-being for retirees who need their assets to work hard for them.
This is a prime example of loss aversion in action and reinforces why behavioral coaching is critical when transitioning to decumulation.
But not all threats to a successful retirement stem from emotion. According to Goldman Sachs Asset Management’s 2024 Retirement Survey & Insights Report, more than 60% of working Americans say that competing financial demands (what Goldman Sachs has coined the “financial vortex”) have disrupted their ability to save for retirement.
These include high monthly expenses, credit card debt, student loans and caregiving responsibilities. Even well-informed savers can fall off track without a plan that accounts for these real-world disruptions.
Behavioral coaching is essential, but it still must be paired with practical planning strategies that help clients manage both emotional impulses and financial complexity.
The adviser as behavioral coach
Success for today’s financial advisers is no longer measured solely by portfolio performance; it’s about aligning your client’s financial decisions with their values, life goals, health considerations and emotional well-being.
The strongest adviser relationships go well beyond managing money. Listening closely, understanding your client’s concerns and helping them stay confident through both market volatility and life transitions are critical skills.
Retirement is as much an emotional journey as it is a financial one. Today’s best advisers understand they must provide expert financial guidance and serve as an emotional stabilizer — helping clients stay grounded, confident and committed to their plan, even when the journey gets difficult.
Fortunately, behavior can be guided, especially when the planning process reinforces clarity and purpose.
One powerful technique is to shift the focus of planning conversations away from financial returns and toward larger goals, structuring conversations around the client’s life goals and legacies.
When clients see how their income strategy supports their desired lifestyle and personal values, they’re more likely to remain grounded.
Two structured withdrawal approaches that reinforce this confidence and can reduce anxiety include:
- Flooring. This strategy builds a guaranteed “income floor” to cover essential expenses using predictable sources such as Social Security, pensions or annuities. The goal is to ensure that no matter what happens in the markets, the client can reliably meet their basic living costs.
- Bucketing. This strategy segments a client’s assets by time horizon — short-term (one to three years) cash for near-term spending, midterm (four to 10 years) moderate-risk investments and long-term (10-plus years) growth assets — helping clients see how their money is allocated and reducing anxiety during market volatility.
These strategies help clients understand where their income is coming from, how long it will last and what’s protected from market turbulence.
During times of market turbulence or personal stress, regular behavioral check-ins can help reinforce clients’ long-term perspective.
Schedule proactive conversations and remind them of their goals. This helps corral knee-jerk reactions and discourages other emotional decision-making.
Incorporating client personality assessments into your process can also add valuable insight to how each client processes risk and uncertainty, allowing you to tailor communications accordingly — providing emotional reassurance to some clients and analytical clarity to others, based on their individual decision-making styles.
Turning a risk into a rewarding differentiator
The best retirement plan is one a client won’t abandon. That means while client behavior is a fundamental risk, your ability to manage it expertly is a highly valuable, differentiating skill to acquire and embrace.
Behavioral guidance has arrived. No longer just a soft skill, it is now a critical strategic advantage.
Advisers who understand how to coach clients through the emotional challenges of retirement can build more trust, more confidence and longer-lasting relationships.
In a profession where performance is often commoditized, those human connections may be the strongest, most enduring source of value there is.
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