Marching blindly into retirement
Are we willing to improve our financial positions? Rob Stock asks why a new survey says ‘not really’.
When Mercer conducted a global survey on ‘‘the new imperative for financial security’’, it found eight in ten people believed it was ‘‘up to them’’ to pay for their retirement.
Half of people surveyed believed they were solely responsible, believing governments would not be able to pay living pensions as populations in the developed world aged.
And Mercer found what appeared to be a willingness by the majority of people to do more to give themselves a rosier financial future.
Mercer found that 85 per cent were willing to change their current lifestyle, making trade-offs to enable them to cut costs and save more.
The trouble was, Mercer found, that very few people were actually making those changes, and trade-offs.
When asked what people were willing to do, the top seven responses were:
❚ Save a greater proportion of my income: 40 per cent.
❚ Spend less money and downsize my life:
32 per cent.
❚ Take on part-time work: 27 per cent.
❚ Downsize my house, car, or other assets: 19 per cent.
❚ Work for longer, full time: 13 per cent.
❚ Be less charitable: 10 per cent.
❚ Stop going on holiday: 9 per cent.
‘‘Although most of us accept the responsibility that ‘it’s up to me’ to save enough income for later years, we do not take the necessary actions,’’ said report author, the aptly-named Rich Nuzum.
The report also identified a morass of financial stress with 60 per cent of the people it surveyed feeling ‘‘somewhat stressed’’ to ‘‘extremely stressed’’ about their financial position.
Retirement Commissioner Diane Maxwell said there were many reasons why people didn’t take steps to improve their retirement prospects.
Some were caught in the ‘‘now’’, so focused on today, with busy lives, and children, that they just put off planning.
Others weren’t saving because they had great expectations of inheriting money, or a property.
And some didn’t think they were going to live long enough to make it worthwhile after seeing older generations of their family die in their 50s and 60s.
‘‘Up north teenagers we were talking to were thinking about today because they were thinking why would I prepare for a retirement, when I don’t think I would still be here?’’
There was also an ethnic overlay to who felt they needed to take responsibility for retirement, with Asian people more likely to go hard believing they needed to secure their own retirements.
And, Maxwell said, there were many just making ends meet, whose focus should be on improving today, and building their emergency savings.
Mercer noted that the increase in people living financially unstable lives was threatening to have a big impact on societies.
It concluded that the rise of unstable, temporary work – often referred to as the ‘‘gig economy’’ – was a barrier to amassing wealth.
Many younger people in developed countries were experiencing an acute financial security gap.
‘‘Millennials, who expect to and will actually live longer, face a savings gap compounded by changing jobs more frequently over their lifetimes than previous generations did,’’ Nuzum said.
But not all millennials are giving in to inaction and despair.
One fired-up group who are showing what’s possible are the adherents of the FIRE wealth accumulation model. FIRE stands for ‘‘financially independent, retired early’’.
It’s largely a millennial movement of independently-minded people not intending to take the traditional slow and steady route to retirement, which looks increasingly like a strategy doomed to fail thanks to student debts, high rents, and high house prices.
Those in the FIRE movement keep their costs way down, and prioritise experience and freedom over consumption and owning ‘‘stuff’’.
They save and invest a very high proportion of their incomes, set themselves specific wealth targets, and strategies to achieve them by a specific age.
Hannah McQueen from personal financial fitness consultancy EnableMe is impressed by the commitment of the FIRE devotees, but suspects many will ‘‘burn out’’ on their frugal, minimalist lifestyles.
What impressed her about LIFE proponents was their setting of ‘‘ambitious financial goals’’.
‘‘Kiwis especially don’t know how to set ambitious financial goals,’’ McQueen said. ‘‘They are not brutally honest in self-diagnosing their starting points.’’
Simply participating in KiwiSaver at the minimum level is not a winning strategy to prepare for retirement, said McQueen.
‘‘KiwiSaver will account for approximately 38 per cent of what’s need for retirement. There’s a gap there.’’
Everyone can do better in improving their savings rate (people should save at least 20 per cent of gross income, McQueen says), and their financial security, but only ambitious goals, and fast strategies to achieve them, could get people motivated enough to change their lifestyles.
The idea of increasing mortgage repayments to knock one year off a 16-year mortgage was not compelling to most people.
Creating a strategy to do it in five years grabbed people’s attention far better. ‘‘So often financial plans are so boring and tedious,’’ McQueen said.
If people are not making progress financially, they paradoxically feel a greater urge to spend on lifestyle, McQueen believes.
All but the highest echelon of salary earners would struggle to amass the wealth to fund a comfortable retirement without doing more than live frugally and save.
McQueen said people wanting to do so needed to use ‘‘leverage’’ to speed up their wealth accumulation, which meant going into business, or property, or both.
In the United States, recent research suggested that an income of US$72,000 was needed in order for households not to feel financially stressed, McQueen said. Median US household income is just over US$59,000, according to the US Census Bureau.
For some, amassing wealth quickly at the expense of ‘‘lifestyle’’ is motivated, in part at least, from the desire not to live the life of money worries Mercer found so prevalent.
Sonnie Bailey, a fee-based financial planner from Christchurch who blogs on money strategy, doesn’t hope to retire early like the online Kiwi FIRE community, which he is in contact with.
‘‘I want to die with my boots on,’’ he joked.
But the family man’s motivation to spend and save mindfully, and to work towards goals for financial independence, was partly motivated by a desire to live a life not plagued by financial stress.
‘‘To me it just makes a lot of stress and unnecessary worry disappear,’’ he said.
It also allows him to be the kind of dad he wants to be.
‘‘It’s given us the flexibility to spend more time with the children,’’ he said.
Like many FIRE adherents, he blogs because wanting to share his convictions is an ‘‘itch that just has to be scratched’’.
And that gives financially stressed people looking for someone to inspire them to adopt ambitious goals plenty of examples to learn from.