Help your clients get past their present bias

The National Institute on Ageing (NIA) has published a new report in its series on the advantages of delaying Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) benefits. Author Bonnie-Jeanne MacDonald told Advisor.ca that her latest instalment — “Improving Long-term Financial Decision-making by Bridging the Psychological Divide Between Today and Tomorrow” — can help financial advisors coach their clients.

There are exercises in the paper to help advisors find new ways of talking about pensions with their clients, she said.

MacDonald’s core insight is that present bias makes clients prioritize immediate needs at the expense of future requirements.

“It comes from a good place,” said MacDonald. “It means that people don’t worry a lot about the future.” But it complicates long-term planning and leaves clients vulnerable to inferior retirement outcomes and unforeseen expenses later in life, many of them health-related.

“Baby boomers aren’t just the first generation to live a long time. They’re also the first generation to have relatively few children,” said MacDonald. “It’s adult children who care for older Canadians, for the most part, it’s not the government.”

MacDonald wrote in her paper, “a retiring Canadian’s ‘future self’ is often a more vulnerable person who would greatly benefit from the additional amount of automated, secure, steady, inflation-indexed CPP/QPP income that their ‘current self’ is choosing to forfeit by starting their pension earlier.”

Optimism bias further complicates retirement planning. “You assume bad things happen to other people,” she said. “You assume you have more control over these things than other people would.”

Clients also miscalculate what they’ll spend in the future. “You put your current needs first, and part of that is you underestimate your future needs,” she said.

A decision to take CPP or QPP early can be costly, MacDonald said. But it’s difficult to get clients to defer for substantial periods of time.

“Intentionally adjusting the proposition away from ‘wait five years’ to ‘one year at a time’ is called ‘temporal reframing,’ where the time and money sequencing is changed from a large chunk to more bite-size pieces,” she wrote. “This type of reframing has been found to effectively influence a range of financial decisions … [E]xplaining the advantages of delaying CPP/QPP benefits in terms of the short-term financial reward can help overcome the significant mental barriers of using savings to purchase secure retirement income.”

Kevin Press

Kevin Press is editorial director for Advisor.ca. He has been writing about money since 1997. Reach him at kevin@newcom.ca.