There is increasing investor autonomy in today’s world – the range of information available online and in the form of apps give investors an abundance of knowledge to manage their finances on their own. Theoretically anyway.
On the one hand, freedom of information is great for expanding the financial literacy of individuals and allowing them to take control of their finances.
On the other hand, when it comes to planning for your retirement, there is a great deal of complexity and interlinking components that require a vast amount of knowledge to make the best possible decision for your financial circumstance.
There are limitations when it comes to using digital tools and ‘robo-advice’ type services. Often these present information in a two-dimensional way that can cloud your view rather than make it clear.
A recent study in the Journal of Marketing Research, which focuses on information presentation in retirement wealth, demonstrates that the way in which we perceive meaning is in relation to the way information is presented to us.
If I asked you whether you would like a lump sum of $1 million or $5,000 a month for retirement, which would you choose? Does one seem to be more adequate than the other?
In actual fact, these two amounts are roughly equivalent based on current annuity pricing, however, people will feel very differently about one compared to the other, as the findings from the study tell us.
Depending on the amount you picked, this phenomenon is termed the ‘illusion of wealth’ or the ‘illusion of poverty’.
The ‘illusion of wealth’ can be attributed to those of us that picked the lump sum of $1 million. This can be described as having a false sense of security in the large amount presented to us. As such, it can lead to some people not saving enough for retirement from the misleading belief that they have more than they will need.
Yet for those of us that chose the $5,000 a month as being more adequate than $1 million for retirement, we suffer from the ‘illusion of poverty’ because we think the amount of $1 million is probably less than $5,000 a month. And this mentality equates to the feeling that what we have is probably not enough. It can lead to a very conservative lifestyle and cutting back on things we normally need.
This highlights how information architecture can affect people’s financial decision making. If the format of the information changes the way we perceive our wealth, then public policy needs to take into account the psychology of wealth when helping us plan for our retirement.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.