Let’s imagine two groups of people looking to hire a car. One is told they can have any colour they want, but if they don’t make a choice they’ll get a red one. The other is offered the same deal, except instead of a red car they’d get a blue car.
If our real life behaviour is anything to go by, we’ll see plenty of people in the first group wind up with a red car and plenty in the second group wind up with a blue car. But can we say that’s because the first group all preferred red and the second group all preferred blue?
In a lot of cases we have to wonder if people are really making a choice or if they’re settling for something simply because it’s the default. We call this a default bias.
We often see something similar play out in superannuation, where most people are in a default fund, set to the default investment option, with the default level of insurance. All these things can be very consequential. If you’re in an investment option that isn’t suitable given your age and goals, you could miss out on hundreds of thousands of dollars in retirement savings.
Of course, there might be an element of regret minimisation going on here too. We tend to feel more regret when making an active choice (an act of commission) versus not making an active choice (an act of omission). So someone might be in their fund’s default investment option and not feel so bad if it does poorly because they didn’t really choose it.
Actively managing your super
Many people think that super is too hard or they’re too busy to give it the attention it warrants. Here, it might be helpful to focus on the simpler decisions you can make and park the decisions that are more complex, at least for the time being.
Let’s go back to the example of people on their super fund’s default insurance option. If you have a minimum level of cover, it means that if you die or become permanently disabled, you or your dependents will probably receive some benefit.
This amount might appear to be significant at first glance, but if you compare it with the amount that you’ll need to repay your mortgage, live independently and care for your children on one income, or (if you’re permanently disabled) hire a carer and reconfigure your home, all of a sudden it can seem woefully inadequate.
If you want a more detailed picture, try looking at the amount of insurance you have via super, and then use an insurance calculator to work out how much you should have if you want your family to be provided for if the worst happens. Chances are there will be a vast gap between those two numbers.
Here’s where you might need to make a choice, and you don’t necessarily need to make it with all possible future expenses in mind. For example, bumping up your insurance by just enough to cover your mortgage could leave your family with one less thing to worry about if you pass away.
Super can be difficult to wrap your head around, and it’s tempting to believe that it’s all being taken care of behind the scenes and without our input. But there are ways we can actively manage it and, hopefully, generate favourable outcomes for ourselves and our families.
