Growing personal wealth for a comfortable retirement

Retirement planning is an essential element needed to create the type of personal, wholesome wealth that will ensure investors are able to live comfortably and care for themselves and their families once their active working days are behind them.

However, even sound retirement strategies and an investor's best intentions can fall victim to the human condition, as investors often get swept up in trying to maximise returns or make irrational decisions that influence investment returns due to emotion or other psychological factors.

This type of behaviour has captivated a subset of economists - behavioural economists - for decades. In their quest to understand the decision-making process, particularly when it comes to investing and saving, they have identified key factors that materially impact wealth creation and explain why most people tend to under-save for their retirement.

For instance, one of the most prevalent savings-related behaviours in modern society is the intention-behaviour gap - the disconnect between knowing what you need to do and actually doing it. This explains why we often fail to act in our best interests despite knowing what is best for us. In the case of retirement savings, this could be starting to save too late or saving too little to meet our basic needs and priorities in retirement.

One of the key factors that creates this disconnect is temporal or time discounting, which refers to the tendency of people to discount the value of rewards they'll receive in the distant future due to a "disconnect" between what the present self believes will benefit the future self. In practical terms it is the reason why, when given the choice between a comfortable retirement in 20 years and a new car today, many of us choose the new car. It's a form of instant gratification that appeases the wants of the present 'self'.

Thankfully, behavioural economists and industry players that are truly interested in building wealth for a more comfortable future for customers, employees, and society at large, in an ethical way, have a few suggestions to overcome these challenges.

In terms of creating wealth, it's clear that people are better off saving or investing a small, often seemingly insignificant, amount from an early age than they are putting it off, for whatever reason. Time is the biggest ally for any investment. People therefore need a strong incentive to start saving early, preferably something that has severe, immediate consequences for any inaction. In behavioural economics parlance this is known as a commitment device.

Retirement savings should also be considered long-term investments, where a client's assets must match their liabilities. This is in stark contrast to prevailing industry trends, where many in the industry take a performance-based investment strategy to earn the highest returns possible, often with little consideration for the associated risks.

The reason why retirement savings are structured over a longer period of time is to minimise the risk and ensure a return and that sufficient wealth is created to secure a comfortable future in retirement. Accordingly, retirement investments should always be conservative, regardless of an investor's age. As such, an ideal strategy should balance risk through investments with some equity and property exposure, and access to money markets and interest bearing instruments.