Overconfidence Can Kill Your Retirement Planning
Eight in 10 millionaires fully expect to have sufficient income to live comfortably during retirement, according to a 2013 Spectrem's Millionaire Corner wealth level study of households with a net worth between $1 million and $4.9 million (not including primary residence). This confidence may in part be tied to the premium millionaires place on financial knowledge.
Nearly nine in 10 millionaires (88%) surveyed by Millionaire Corner stated that financial knowledge was either "extremely important" or "important" to them, compared with 82% of those with a net worth between $500,000 and $1 million and 74% of those with a net worth of less than $100,000. The wealthier the millionaire, the greater the confidence in his or her financial knowledge. Those with between $5 million and $24.9 million consider themselves very knowledgeable about financial products, compared with 22% of millionaires with up to $5 million.
But a new survey of 5,000 defined contribution plan participants by the National Association of Retirement Plan Participants finds that being overconfident in one's financial knowledge may be hazardous to retirement planning.
The NARPP survey found nearly equal measures of confidence extremes, with 20% overconfident and 23% underconfident about their ability to secure a sound financial future. On the plus side, those who are overconfident in their financial knowledge were found to be more likely to take decisive steps to determine how much they will need at retirement compared with their underconfident counterparts. The survey also found that these retirement-plan participants were more likely to contact their plan provider or sponsor for guidance.
On the downside, though, retirement-plan participants with an excess of confidence in their financial knowledge were found to have less money set aside from their paychecks for retirement and have smaller plan balances than their underconfident peers.
The survey found that men are more likely than women to fall into the confident camp. More than half (53%) of men have calculated what they need for retirement, compared with 39% of women, the NARPP study found. Almost one-third of men (32%) are confident they will have enough money on which to retire, compared with only 24% of women.
The survey also found that younger retirement-plan participants tend to be more overconfident than older employees in their retirement readiness expectations and in taking decisive action regarding their retirement savings moves.
This is consistent with a 2013 Spectrem's Millionaire Corner retirement plan participant study that found younger participants significantly more confident than their older counterparts that they will not outlive their savings in retirement.
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