Practical Applications of The Unrealistic Optimism That Threatens Retirement Security

Practical Applications Summary In The Unrealistic Optimism That Threatens Retirement Security, from the Fall 2019 issue of The Journal of Retirement, author Alfred Rappaport of Northwestern University details the retirement crisis facing Americans today. Fewer employers are offering lifetime pensions, and nearly half of American families have no retirement savings—but most Americans believe they are on track to a comfortable retirement. This unrealistic optimism comes from the fact that Americans underestimate their expenses in retirement while overestimating how much their investments will grow once they start saving. Investors often assume they will realize high rates of return in line with historical growth rates. However, they often sabotage their retirement nest egg’s potential by failing to reinvest dividends, and by investing when the market is high and selling when the market is low. Investors also often fail to factor in investment fees, inflation, and taxes. The author gives investors a reality check, providing tools that show how these factors cut into retirement savings over time. Financial advisors can use these tools to educate their clients and create retirement savings plans that are free of unrealistic optimism.