Just how adept are you at predictions? Could you guess the future financial performance of your business within a few percentage points? Can you estimate the date of your death within a few years?

In most cases, you'll say that you can accurately predict outcomes such as these. And in many more cases, you'll be more wrong than you think. This is known as the "overconfidence bias," which as a financial advisor, you are likely quite familiar with. This bias comes about due to a lack of facts - your clients will feel that they are well-informed and prepared, especially on the subject of retirement, when in fact they are missing crucial pieces of information.

Is retirement literacy cause for concern?

Many Americans are not well-educated about retirement planning. Even more concerning is the idea that a significant portion of today's population believe that their financial futures are quite secure - a sign that many are victims of overconfidence bias regarding this aspect of wealth management. 

Overconfident clients are rarely a positive for any financial advisor. When it comes to retirement planning, this can get in the way of sound advice. In a worst-case scenario, a client can completely disregard the guidance of their advisor, opting to take charge of their retirement instead.

Larry Divers, CWS®,CRSP™, AIF™, and Cannon Financial Institute executive vice president, explained that a "mental shortcut" leads to overconfidence among clients. Who wants to admit they won't live long at all? Or that they will live too long? A lack of ability to deal with extremes surrounding retirement planning causes many people to take that shortcut and overlook the harsh realities of long-term money management.

The problem then becomes how to reach these clients who are overconfident, so their retirement planning is moving forward on the right path. 

Overcoming overconfidence among clients

When talking about retirement, it is important that you approach clients - especially baby boomers - with the overconfidence bias in mind. Lowballing an estimate about a trivial matter is one thing, but lowballing an estimate about life expectancy is a completely different issue for retirement-age adults.

In fact, many clients underestimate how long they will live following retirement. They then plan their yearly income based off of this incorrect number, and have an incredibly high chance of running out of money when they need it the most. In addition, many clients also overlook the issue of inflation when retirement planning. The money they need to retire now won't be the same five, 10 or 20 years down the line.

These problems can be avoided in two key ways: assessing current models and suggesting a second opinion

1. Look at your current models

If your clients present signs of the overconfidence bias, you can help by first assessing your current models. For example, you may work with your client who is 65 years old and has saved $100,000 for retirement. Depending on the rate of return and the sequence of that return, his or her money could last different lengths of time. If the client is pushing in a direction opposite to your models, then offer to look over everything again.

2. Suggest a second opinion

This tactic can work for a variety of overconfident clients. If they are disagreeing with your guidance, simply ask them if they'd like a second opinion. In most cases, they'll say yes. Now, you can offer your ideas in a way that is more stress-free and non-confrontational.

Address issue of Social Security

The overconfidence bias can impact many different elements of retirement, but one of the largest is Social Security. Unfortunately, as noted by Divers, many Americans misjudge their life expectancy, their expenses and other factors - and, as a result, dip into Social Security too early.

"People really don't understand social security, as 48 percent regret using it, because they reduce their income stream," he pointed out. "Once you file, you can't change it, and you're done."

The lack of clarity surrounding Social Security will have obvious negative repercussions. In a special for CNBC.com, Andrew Osterland explained that Social Security has become the primary source of retirement income for too many people. However, the earlier a client uses Social Security, the smaller the benefits will be.

Social Security is an inflation-adjusted annuity. If a client delays taking it, they can increase their benefit amount. In fact, it is often better to delay past retirement age - even to the age of 70 - instead of using it earlier. As stated, many of the people who file for Social Security prior to retirement age end up regretting that decision.

Target misconceptions to overcome bias

As you encounter more clients with the overconfidence bias regarding retirement planning, you must target their misconceptions in order to overcome these obstacles.

The main methods you can achieve this is by:

• Offering to take a second look at their calculations
• Discussing the issues surrounding Social Security

These two areas are where many clients make mistakes. They assume that they have enough income to last through retirement, but unfortunately many do not.

Divers added that clients can also maximize their social security benefit because it is an inflation-adjusted annuity assured by the U.S. government. It is important to stress the value of delaying. If clients delay, they can get that increase in their benefit amount. This can help replace the overconfidence bias with actual confidence - and financial security - about the future.

Don't just challenge a client's beliefs. Ask them to entertain a second opinion and provide them thoughtful analysis counter to their existing strategies. With this complete, you can help clients turn what they have into an income strain that they can't outlive.

To learn more on this topic, register for our Retirement Plan Services course or learn more about our other offerings at www.cannonfinancial.com.

Copyright ©2015 Cannon Financial Institute - All Rights Reserved

Subscribe to Cannon Insights at http://www.cannonfinancial.com/newsletter/subscribe

Sources/Resources:

http://www.cnbc.com/id/49103647#

http://www.cnbc.com/id/101230173#

Disclaimer: The materials and information contained herein are intended for educational purposes, to stimulate thought and discussion so as to provide the reader with useful ideas in the area of wealth management planning. These materials and information do not constitute and should not be considered to be tax, accounting, investment, or legal advice regarding the use of any particular wealth management, estate planning, or other technique, device, or suggestion, nor any of the legal, accounting, tax, or other consequences associated with them.
While the content herein is based upon information believed to be reliable, no representation or warranty is given as to its accuracy or completeness. For this reason, the program of study should not be relied upon as such. Although effort has been made to ensure the accuracy of these materials, you should verify independently all statements made in the materials before applying them to your particular fact pattern with a client. You should also determine independently the legal, investment, accounting, tax, and other consequences of using any particular device, technique, or suggestions, and before using them in your own wealth management planning or with a client or prospect. Information, concepts, and opinions provided herein are subject to change without notice. The strategies contained within these materials may not be suitable for all clients. For many concepts discussed herein, clients are strongly urged to consult with their own advisors regarding any potential strategy and will need to strategy described herein is suitable for their particular circumstances.
Examples, provided throughout these materials, are for illustrative purposes only, and no representation is being made that a client will or is likely to achieve the results shown. The examples shown are purely fictional and are not based upon any particular client's circumstances.