Cancel present pleasures for future benefits

Cancel present pleasures for future benefits
28 May 2013

Did you know that the part of the brain that lights up when we think about our future self (ie an older us) is the part that relates to other people?

This is major news! Little wonder then that we don't eat as healthily as we should, exercise enough, or save what's actually needed to meet our future needs when we retire. After all, that future 'us' isn't really us, it's someone else!

Know which 'self'

And so, the battle between present self and future self ensues. The thing is that's it's a pretty unequal battle; after all, there's no one to stick up for future self, and by giving in to constant temptation and the desire to spend and enjoy life now means that present self can trample all over the dreams of future self. Present self wants to consume and doesn't recognise future self, while future self is upset and wants present self to save.

The thing is that tomorrow does come, like clockwork, and there are very real consequences to be borne not only by the person who doesn't save, but also by all who love or are affected by him or her.

Future forecast

According to a recent HSBC survey that questioned over 15 thousand people across 15 countries, including the UAE, 48% of those questioned have never saved towards their retirement. I believe the reality out there is, and will increasingly become worse as global economic problems continue to play out.

One seemingly eternal quest is figuring out how much is 'enough' to retire on. When asked, people on average said they would need 78% of their current income once they enter retirement in order to sustain a comfortable lifestyle; going by current data, having this is far from realistic.

How much do you need?

Let's get a feel for how much money we're talking about: People expect retirement, on average, to last around 18 years. If you do a quick back-of-the-envelope calculation, would you be able to sustain yourself for 18 years on the global average of $34,380 – ie if you have around half a million dollars set aside? It's most likely that your savings behaviour - what you're doing (or not) to save for later on in life - falls way below this, or what you would like for yourself during retirement. You have to ask yourself if you want an active life of exploration and discovery, or one of subsistence and getting by.

Now transport yourself across time, look in the mirror and talk to, or even better, be your future self. Is this how you want to live? Not able to afford things later in life? I bet my bottom dollar that the answer is no. So how can we change our relationship with our future self so that we are more mindful of today's habits and how they affect our life later on.

This is the big issue: changing habits, and sticking to goals. One way of doing this is through opt-in schemes, where the benefit of changing our behaviour is explained – this is called 'enhanced active choice'.

This is a real example: participants were told “We would like you to imagine that you are interested in protecting your health. Your employer tells you about a hypothetical program that recommends you get a flu shot this Fall and possibly save $50 off your bi-weekly or monthly health insurance contribution cost”. The three choice structures tested (and the results) were then:
 

(Opt-in) “Place a check in the box if you will get a Flu shot this Fall – 42% ticked the box

 (Active choice) “Place a check in one box: I will get a flu shot this Fall or, I will not get a flu shot this Fall”: 62% ticked the box for a flu shot

(Enhanced Active Choice) Place a check in one box: I will get a Flu Shot this Fall to reduce my risk of getting the flu and I want to save $50; or, I will not get a Flu Shot this Fall even if it means I may increase my risk of getting the flu and I don’t want to save $50: 75% ticked the box for a flu shot.

And so, extrapolating from this, place a tick in one box: I will save money every month towards my retirement so I can live a decent, independent life, and not like a pauper or have to ask for help.

Or:

I will not save for my retirement, even if this means that I will increase the risk of being dependent on others later in life and not have much option or control over where and how I live.

It's not good enough to be reminded of what you will lose if you don't follow through with action. Your present action is directly connected to your future life.

Which box will you tick?

This article by Nima Abu-Wardeh first appeared in The National.

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Comments

  • Colin
    Colin
    2013-05-28T12:59:12

    Merrill Lynch has created a website called Face Retirement, which allows people to "meet the future you." The site uses a camera to "age" anyone who wants (or dares) to have a look. Seeing one's future self is a little alarming but also at least a little fun.. whilst hopefully having a good impact.

  • nima
    nima
    2013-06-04T19:13:08

    I wonder whether they'll share any difference in uptake of retirement plans/ pension policies as a result of this face retirement (who thought of the name!). Would be interesting to find out. 

  • Colin
    Colin
    2013-06-04T22:11:04

    There has been a fair amount of research by behavioral economists, such as this study.  In all cases, those who interacted with virtual future selves exhibited an increased tendency to accept later monetary rewards over immediate ones. 

  • ConsumerWatch
    ConsumerWatch
    2013-06-10T12:20:57

    I think anyone with a degree of intelligence should work very, very hard and save diligently towards retirement. As you say set the goals, and go do it. A realistic figure to aim for should be US$ 2 million, even if you can get a 4% compounded interest rate on that figure when you retire it is close to US$ 50K per year and let's face it if you are in your 40's now by the time you retire you will need at least that amount. The NY Times is echoing much of your points this weekend Nima, indicating the average person will live 20 years into retirement (and some 30 years). One million is not enough!

  • nehad6ismail
    nehad6ismail
    2013-06-10T17:11:03

     Nima this is an important subject. In the UK the tax and welfare system penalises those who work hard, plan well and save for their old age. You are taxed if your pension is above £10,500 pa i.e US$15300 pa. Any extra money you make from part-time work or consultancy fees etc is taxed. If you don't save and don't qualify for a full state pension, you get tax credits to make up the short-fall. What's the point of being careful and thrifty? 

    Apart from the State pension to which I contributed more than 30 years, I have a seperate private plan since 1982. My only beef is the tax system which is heavily weighed in favour of the lazy and indifferent.

  • joanna
    joanna
    2013-06-11T09:08:30

    Nehad - you are so right. It's very tricky for pensioners in the UK right now - and unfair as you are basically being taxed on money you already paid as tax. I know several people who chose to invest in property which they plan to sell when they retire as an additional income.

  • nehad6ismail
    nehad6ismail
    2013-06-11T09:51:16

    Property makes sense as a source of rental income and/or capital appreciation when you sell. Some of my friends are doing exactly what you say.

  • Colin
    Colin
    2013-06-11T13:49:16
    • Mita Srinivasan Thanks for frightening me ....

    • Andrea Krizsak True, having said that the Government can only tax people who have the extra money, and that will then go to the people who don't, so it's a bit of a catch 22. I think the best idea might be to encourage everyone to want to work hard and take pride in what they do, so they will enjoy working, and won't only be trying to maneuver around working less and getting more money off the state. I believe that most people who can afford it will not mind their tax being spent on people in need, as long as it's a genuine need. That is indeed the whole idea behind pooling resources together.

    • Ahmed Elnaggar $15,300 pa?? A 1st World treatment...

    • Nima Abu-Wardeh It is very scary - I don't know the answers - other than knowing very strongly that I don't want to be destitute or dependent later on in life! Can I please invite you to post your comments on the original cashy article? Pretty please? Plus: What is your retirement plan?

    • Ketaki Banga Don't put all your eggs in one basket. A mixed portfolio. That's been the plan so far. But yeah, to echo Mita, thanks for the scare! :)

    • John Falchetto, MA Retirement? What's that?

    • Nedal Alomari What's the difference between active choice and the enhanced version?

    • Maria Sorger, MBA If you dont want to be a burden onto your kids or relatives, it is imperative to save and prepare for your retirement. You dont have a choice about aging but you do about saving for old age! It's your responsibility.

  • NedalOmari
    NedalOmari
    2013-06-11T09:06:13

    Not sure what's the difference between active and enhanced active choices? Why more people opted for the enhanced?

  • Colin
    Colin
    2013-06-11T10:28:52

    More people opt for the enhanced because of inertia, basically when the box is preselected it makes the choice easier for some people. The groundbreaking study Save More Tomorrow found many more people acted on the enhanced, consequently governments around the world have introduced enhanced opt in - in the UK a new Towers Perrin report showed over 90% take up rates at FTSE 100 companies with enhanced opt in. People take the easiest option, checked enhanced opt in, they stay with the status quo - but in this case it is good for them.

  • Ketaki
    Ketaki
    2013-06-11T10:11:48

    Culturally, we Indians tend to save not just for our old age but for our children's future too (education, marriage, etc). A typical savings plan covers both. It's even more worrying when you think about how expensive both scenarios will be a few years from now. 

  • Colin
    Colin
    2013-06-11T11:20:06

    Managing pensions and taxes is a terribly tricky fine line - why do things have to be so complicated? One of my friends father (multi-millionaire) who is still alive transferred his wealth to a trust, takes the minimum per year pension to stay below the tax threshold and his children supplement his needs. They will of course benefit when he dies and the amount they give him annually is perfectly affordable from tax exempt gifts he has given them... and perfectly within the bounds of the UK law - plus he has paid millions in tax over his working lifetime, so he feels it is not only legal but morally acceptable too. It does require careful planning and setting up with a tax lawyer.

    I think one of the biggest issues most people have is maximizing their estate tax exemptions and the best way to do this is through a trust. A trust minimizes taxes which takes care of surviving spouse, children and maybe future generations too. 

    There is a cashy article on trusts which outlines some specifics. Trusts differ from country to country in terms of minimum values, property, company assets, shares, etc but the fundamentals are the same and should be a priority in pension and retirement planning.
  • joanna
    joanna
    2013-06-11T11:47:36

    What's your take on SIPP's? Are they a secure bet? I thought this article was interesting.  

     

  • Colin
    Colin
    2013-06-11T12:04:29

    I think SIPPs (self invested personal pensions) are a very good route Joanna. It is similar to what I was advocating in the article on your biggest investment choice. My own choice is a mixture of shares and commercial property which the UK government allow in SIPPs. I am wary of fees, for example in the UK annuities are being investigated due to high fees, so SIPPs suit me perfectly - it really does mean doing the work yourself. In terms of index funds I like Vanguard, very low fees and good returns to top up a SIPP.

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