“Sensible retirement planning” series Ignoring our age is only human

Financial planning for retirement needs to be long term. Most people know this, but don’t always act accordingly.

by Jackie Bauer and James Mazeau 09 Apr 2021
Image: Pia Bublies

It’s never too early to pay assets into a private pension fund.. This is crucial to maintaining your current standard of living in retirement. Despite this, a third of the Swiss workforce do not have a pillar 3a account and of those who do, only very few regularly pay in the annual maximum amount. Many people do not pay enough attention to private retirement savings, especially when they are young. In this part of our “Sensible retirement planning” series, we look at the reasons why and illustrate what you can do to mitigate this problem.

1: How behavioral tendencies influence us

Decisions can be rational or based on behavioral tendencies, which is why it’s important to understand the mechanisms behind them.

2: Ignoring our age is only human

Financial planning for retirement needs to be long term. Most people know this, but don’t always act accordingly.

3: What you have can also fall in value

Those who save for their retirement want security but sometimes still back the wrong horse, often due to the “cash illusion.”

4: In the long term, only a good strategy works

Anyone who invests in securities in pillar 3a must be aware of the behavioral tendencies that can prevent a successful strategy.

5: Good decisions take time

The ability to keep your emotions in check is a major factor in successfully providing for your retirement.

Many employees have at least some surplus money that they could invest privately for their retirement, but fail to do so. This is partly because we prefer to think about the near future rather than much further ahead. After all, the distant future is much more uncertain and requires us to think about the end of our lives. Systematically prioritizing our short-term pleasures and consumption habits over future goals (financial or otherwise) is what behavioral economists refer to as a “self-control bias” – in other words, a lack of self-control.

Do you know in which of the three pillars you can build up private savings?

One of the reasons why private retirement provision is sometimes neglected is that the state also pays a pension, making our own responsibilities in this regard seem less urgent. However, it is important to remember that the pension system and the conditions surrounding it have changed since AHV (pillar 1) was introduced in 1948, as well as since the occupational (pillar 2) and private pension (pillar 3) systems were conceived in the early 1970s.

A conservative mindset makes change difficult

Demographic changes, e.g., an increasing number of retired people in proportion to the total population, are putting pressure on the first two pillars of our pension system. Reforms are needed to ensure the long-term stability of the AHV and pension funds. However, change is difficult because, regardless of their political preferences, people tend to be conservative (”conservative bias”) and stick with what they know. This prevents many people from considering demographics and their consequences when they vote or make decisions about their private investments.

Next to conservatism, there is also a tendency called “status quo bias,” whereby what has already been achieved is considered to be more worthwhile than what could still be achieved. However, this tendency tends to prevent us from adapting our strategic investment plan and its direction if circumstances change.

“Sensible retirement planning” series

In the third part of our “Sensible retirement planning” series, we explain what you need to know when formulating a sustainable retirement strategy.