Just as we humans are hardwired for love, we are also hardwired for instant gratification.
Most of us instinctively prefer “now” to “later.” In fact, scientists have been researching this human tendency for years and have termed it temporal discounting. We discount the value of a reward that we will receive by a factor that increases with the length of the delay. Put in plain old English: The longer we have to wait for it, the less important it becomes.
It’s no wonder, then, that those of us in our child rearing, career building years have such trouble assigning much value to planning for our retirement. A 2012 study conducted by Ipsos Reid found that Canadians between the ages of 35-44 have saved only 9% of the nest egg they will ultimately need to retire. The under 35 sect are even worse off, having saved only 4% of what they will need. Most frightening of all, the study found that those Canadians ages 45-54 – those with at least half of their working years behind them - have saved less than one fifth of what they will need to retire.
It’s heartbreaking really.
The way I see it, the more disconnected we feel from our future selves, the more likely we are to continue to choose spending over saving. And the experts tend to agree with me.
A recent article in Forum Magazine said most investors compare the choice between spending now versus saving for retirement to using the money for themselves today or giving it to a stranger in the future. Recognizing this, a division of Bank of America recently launched an innovative software package called “Face Retirement” (Check it out at http://faceretirement.merrilledge.com/). The theory behind the software is that seeing yourself aged helps you better see yourself in the future, making that “stranger” feel more like family. Amazingly, early experiments with the software has seen users allocate twice as much to savings as they were beforehand!
A strategy I find works best when helping clients establish some savings habits is based on the second of Stephen Covey’s 7 Habits of Highly Effective People.
Begin with the end in mind.
Rather than merely playing catch up with your RRSPs this time of year or half-heartedly setting up a regular monthly contribution (or doing nothing at all), I find it helps to document (as best you can) things like:
- What sources of income do I expect to have when I retire (CPP, OAS, company pension, rental income, business income, etc.)?
- Is my pension plan guaranteed? Is it inflation proof?
- What happens if I change careers?
- When do I plan to retire?
- Will I retire fully?
- Will I have a second career?
- Will I want to travel or spend more time with family?
- Will I live in my own home?
- What type of fixed expenses will I have?
- What other types of expenses will I have?
- Who will care for me if I get ill?
- How will my healthcare costs be covered?
- What kind of risk am I willing to take with my savings?
You may not have all the answers the first time you try to do this exercise, but that’s why you revisit your plan regularly. As life happens, the plan adjusts. But at least you have a starting point.
In particular, writing down some actual numbers can be very motivating. For example, knowing you are on track to have a monthly income of $1200 when you retire and determining that you will need $4000 a month to live the way you want, will quickly bring the future clearly into focus. And (although it’s been overused), when you know better, you do actually tend to do better. While you still may be constrained sometimes by cash flow, at least you can see the future and when you can save more, you will likely save more.
William Butler Yeats once said that, “Education is not the filling of a pail, but the lighting of a fire.” I guess because of the work I do, the first time I heard that quote I didn’t relate it to a classroom. Rather, I thought immediately about the way most people save, if they save at all. Mindlessly accumulating, filling our buckets, never really having an “end” in mind. Taking the time to be educated can truly light a fire.
And that can make all the difference.