How to face an uncertain retirement
23 January, 2015
Twenty-five years after it was published, the self-help book Feel the Fear and Do it Anyway remains a classic, with 15 million copies sold in 100 countries. Its basic message is to get stuck into the things that terrify you because you may be surprised at how many obstacles can be overcome.
Scaring people into action has been a fairly successful technique in financial services over the years. When selling insurance, agents would often show a prospect some frightening statistics about their life expectancy and the cost of long-term care; they'd quickly sign on the dotted line. Similarly, many an individual has been scared into saving after realising just how miserable a retirement lifestyle funded solely by the government pension could be.
While contemplating the scary things that may eventuate is neither easy nor pleasant, there is some truth in the saying that forewarned is forearmed.
One of the scariest things that face us all is the prospect of under-saving. It is a worldwide problem and is not going away in a hurry. Despite decades of employer-supported and voluntary retirement schemes, a favourable tax system and marketing by fund management companies, more than half of American households are at risk of being unable to maintain their standard of living in retirement. It is estimated that, depending on the household, Americans face a national retirement savings shortfall of between US$6 and US$14 trillion, or more than US$100,000 per household.
According to a retirement study completed mid-2014, the average British retiree faces living and housing costs in retirement of £409 per week, but has only saved enough to generate £312 per week, resulting in a shortfall of close to £100 per week.
Closer to home, a report last week confirmed that Australians expect to spend around 23 years in retirement but their savings will only last them around 10 years. To my mind, the risk of outliving one's savings is right up there in the scary stakes.
There are many reasons people don't save for their retirement — low earnings and too many current obligations are obvious ones.
Behavioural science also provides at least part of the answer. It is difficult for us to set aside money for 20-30 years' time because we don't know what we'll be like then — and we don't know what we'll need. We can't imagine our future selves, let alone save for our future lifestyle.
I remember reading about a Stamford study that aimed to close the gap between the present self and the future self by using computer-generated images to show young people what they would look like in 50 years. The young person saw their older self (or avatar) living in a virtual world, doing what they might be doing in future years. The young person was then asked a series of questions about time and money.
The early results were promising. In one experiment, young people who saw their elderly avatars reported they would save twice as much as those who didn't. In another, students averaging 21 years of age viewed avatars of themselves that smiled when they saved more and frowned when they saved less. These young people said they would save 30 per cent more than those who had not seen their aged avatars.
While this approach is not going to work for everyone, it does illustrate that feeling the fear and acting on it is as relevant today as 25 years ago. The financial services industry has evolved over the last 25 years and, while scary illustrations are often still necessary to jolt people into saving money and insuring themselves, the range and complexity of solutions and strategies has expanded significantly.
Where advisers and money professionals used to focus on accumulation of wealth to provide a cushion for whatever lay ahead, now the focus is on 'decumulation' strategies. That is, how to plan and manage your finances and your lifestyle so that your income in retirement meets your needs and lasts as long as you need.
Unfortunately there is no silver bullet; decumulation planning needs to be specific to each individual as we will all have different experiences and circumstances pre- and post-retirement.
But facing our uncertain future is a big step in the right direction.