Tips for improving retirement finances
Have healthy role models for money, don’t try keeping up with Joneses
Critics panned it, but there’s a great line from the 1979 film
The Main Event that pretty much sums up our weird relationship with money.
Barbra Streisand played an entrepreneur who learns her business manager has run off with her financial assets.
“When you say I have no money, do you mean I have to be careful at Saks or I can’t afford toothpaste?” she asks an adviser.
And there you have it. There are the big numbers in our lives — the final pay stub, the RRSP balance, the T4 slip, the net worth statement, the debts owed. But the numbers mean very little without context.
Amid the financial market crystal ball-gazing at the recent Morningstar Investment Conference in Chicago, Ill., were a few take-aways to improve retirement outcomes:
1. You need a hero. Having a positive money role model — someone whose financial life you admire but that is pretty close to your own circumstances — was associated with feelings of financial well-being in a Morningstar study. Social comparisons, in general, were more important to financial wellbeing than age, income and even financial literacy.
And it matters to whom you are comparing yourself, the study found. Keeping up with the Joneses led to negative feelings, while making comparisons to the less fortunate created more positive feelings.
For the healthiest comparison, think about someone whose financial life you admire and why.
What decisions or behaviours got them there? Do you have any of those qualities? What is one thing you could do right now to be more like them? See yourself in your role model’s behaviour and emulate it.
2. Forget maximum returns. Nobel Prize-winning economist Daniel Kahneman noted that the ultimate goal should be to create a portfolio with very low probability that an investor will bail out of investments at precisely the wrong time. That tends to wreak more havoc on long-term returns than just about anything else.
Using this philosophy, some money managers create two distinct portfolios for clients, representing the highest and lowest levels of risk the client can or should handle, he said. Retirees often think of this as a “bucket strategy” — keeping money for immediate living expenses in conservative investments, with riskier strategies for money earmarked for years down the road.
3. Embrace your number. The long-time suggestion is for people to save about 10 times their final pay, in a lump sum, to be able to afford retirement. But younger savers have scant job opportunities, soaring university debt and paltry pay.
The stark reality, though, is that the average pre-retiree is on track to replace just 51 per cent of income in retirement, and that’s including Social Security, said Steve Wendel, head of behavioural science at Morningstar. That’s far from the typical recommendation of at least 70 per cent, but the key is for individuals to figure out what they’ll need, and adjust for shortfalls.
Rather than drastically cutting living standards or “working forever,” little changes taken together can make a big impact, Wendel said.
Think about delaying retirement to age 67, scaling back a bit on lifestyle expectations and contributing at least 6 per cent of pay to retirement accounts if you’re just starting, he suggests.
For the healthiest comparison, think about someone whose financial life you admire and why