There was a time when no one retired. It wasn’t old age that would kill you, it was stuff like the plague, an infected tooth left untreated, or a hungry sabre-toothed tiger. For the human race, living past 60 is a relatively recent occurrence. Perhaps that explains why we can’t save for the future. We’re not predisposed to long-term planning.
With borrowing up and savings rates down, many Canadians are spending all they make now. And if that wasn’t bad enough, some are also borrowing from future earnings. Canadian debt-to-income levels hit an all-time high this year. That means some people are on track to spend every dollar they will ever earn in their lifetime before they even retire. Borrowing money to pay for depreciating assets means you are spending future income today that may never be recouped.
So how do we start thinking more long term? According to some academic research, if the Ghost of Christmas Future could show you what you might look like later in life (as opposed to showing you your tombstone), it could do the trick.
Okay, the research doesn’t mention anything about Dickensian supernatural intervention. But it did provide people with advanced renderings of what they might look like at age 65. If you could see yourself with thinning hair, more wrinkles and more salt than pepper, it turns out you think a bit differently about long-term planning.
In the paper, Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self (recently published in the Journal of Marketing Research), the authors found that if subjects were presented with an imaginary and unexpected $1,000 and then asked to allocate that between four options: 1) buying something nice, 2) investing in a retirement fund, 3) planning an extravagant occasion, or 4) putting it into a chequing account, they put twice as much money into the retirement fund if they were shown an aged version of themselves compared with those who were not.
But while we can’t simply put on Hollywood makeup and look in a mirror every time we’re making a financial decision, the message is that if we are more connected to our future selves, we might be better able to think long term. That means instead of taking only a few minutes to think about retirement, we should really take some time to think about what our lives might be like down the road.
For example, you could create a budget based on a low income in the future (assuming you aren’t saving in earnest) and consider how you would spend it. If you can make the future seem more imminent, perhaps the long-term benefit of saving more will become more important than buying something really nice today.
There are really only five things you can do if you find your retirement spending goals won’t be met: 1) die sooner, 2) work longer, 3) spend less later, 4) hope for a better rate of return on your investments, or 5) save more now. The first three are all unpleasant prospects to varying degrees. Option 4 is moot since we’ll assume you’re always trying to maximize your returns for your risk tolerance and that’s a tricky variable to plan solely around anyway. That leaves us with option 5: save more now. Which in theory should be easier to do given the recent market performance’s effect on the number of grey hairs on our heads.
Assume you retired today. What would your typical day look like? Would you go out for a morning coffee with friends? Or brew your own and read the newspaper? Same question for lunch and dinner. Do you eating at more economical diners or are you a foodie who enjoys splurging with friends? Would you travel the world or RV across the continent? How much would these activities cost you today?
Turn over as many stones as you can: How much would you spend on gifts for your grandchildren? The mortgage is paid off, but you still have property taxes and maintenance. You still need haircuts and an occasional additions to the wardrobe.
If you can itemize and estimate these costs, retirement might seem like less of an abstract concept. Once you’ve done that, look at how much you are putting away into your RRSP, TFSA or other long-term savings account. Does it seem more important to increase that as much as you can now?