When it comes to saving for retirement, we often let our biases get in the way. These biases lead to emotional money decisions that can hurt our long-term savings. The tricky part is that we usually don’t notice when we’re making these choices.

Two common biases that tend to impact our investment decisions and retirement savings are immediacy bias and exponential-growth bias. Let’s break them down.

Immediacy Bias

Immediacy bias, also known as present bias, is the tendency to prioritize immediate gratification over future benefits. For example, a survey by the National Bureau of Economic Research asked participants if they’d prefer $100 today or $120 a year from now. More than half chose the $100 now.

We’ve seen this firsthand when talking to younger generations, like millennials—most people prefer the immediate payout, even when patience could lead to bigger rewards. This mindset is a key challenge when it comes to saving for retirement.

A prime example is when people start selling off stocks during market downturns. Panic selling is often driven by immediacy bias, as people focus on the current market chaos instead of their long-term financial goals. This bias can also affect decisions around retirement savings plans like 401(k)s. When money feels tight or investing seems confusing, it’s tempting to skip contributing to your retirement account, thinking it’s better to hold onto cash now. But by doing this, you miss out on the chance to grow your savings over time.

This brings us to another common bias: exponential-growth bias.

Exponential-Growth Bias

Exponential-growth bias is all about underestimating the power of compounding. Many people don’t fully grasp how compounding interest can turn small, steady contributions into significant savings over time—mainly because financial literacy around these topics is lacking.

To put it simply, the money in a retirement account doesn’t grow at a fixed rate. Instead, it grows through compounding, which means you not only earn interest on what you contribute, but also on the interest your account has earned in the past.

A well-known rule related to this is the Rule of 72. It states that you can divide 72 by the interest rate on an investment to estimate how long it will take for that investment to double. There’s also the 2-20-50 Rule, which shows how a small annual growth rate (like 2%) over 20 years can increase an asset’s value by around 50%.

Unfortunately, exponential-growth bias leads people to overlook the value of compounding, causing them to save less than they should for retirement. Without understanding how their money can grow, many miss the opportunity to maximize their future financial security.

Overcoming Biases for Better Retirement Savings

These biases—immediacy bias and exponential-growth bias—are easy to fall into, and they often lead to under-saving for retirement. People see money in hand today as more valuable than what it could grow into in the future.

Even those who are diligent savers can sometimes be influenced by these biases. If you want to build a strong financial future, it’s important to challenge these habits. In fact, research suggests that if everyone overcame their biases, the nation’s total retirement savings could increase by at least 12%. That’s a significant boost, simply by investing earlier and allowing compounding to work its magic.

Ready to Take Control of Your Financial Future?

Don’t let biases stand in the way of your retirement goals. At Navalign Wealth Partners, we’re here to help you navigate your financial journey with personalized advice and strategies. Whether you’re just starting or looking to fine-tune your plan, our team can provide the guidance you need to make the most of your money. Reach out today and let’s start building a brighter financial future together.