I remember my parents in retirement having a life style I envied.
They did not have as much fun while they worked compared to myself, but I am referring to how comfortable they were in retirement. The reason is due to us having two behavioural issues.
The first one being “Present Bias” this is where we put our current enjoyment and hobbies before our long term requirements to achieve the same quality of retirement my parents had.
For example, we need a new TV or car even although there is nothing wrong with the one we have. We just want the newest model even if we are aware that we are not saving enough for our retirement.
This is a serious issue, especially as we are living longer and on the cusp of curing cancer. In fact, due to us living longer and the current low interest rates, annuities and pensions will no longer suffice to pay us enough retirement income the way we wished.
This is irrational behaviour especially in the light of our long retirement and insufficient funds which can turn our final years into a nightmare.
The second behavioural issue is “exponential growth bias”
Albert Einstein once said that the eighth wonder of the world was compound interest. He who understands it, earns it. He who doesn’t, pays it.
This is often because we are not fully aware of how money works, especially during this current period of low interest rates.
As an example, let’s assume we looked at 7% interest. We automatically think that making 7 for every 100 we invest is not a lot, so let’s spend it. What we often miss is that in 10 years this 100 would double to 200 (the eighth wonder of the world). In 20 years that would be 400, in 30 years that would be 800 and if you are lucky enough to have invested early, then in 40 years that 100 would be worth 1,600. Paying 7% p.a. is now 112 p.a. and not 7. This is especially true if you were invested in stocks with a good dividend that rises every year.
Most experts suggest that we save 15% p.a. of our income to prevent us having a very bad retirement scenario. Now this may be too late for some, but not for all of us.
Don’t forget that in the UAE most savings plans will not make you money due to the huge inbuilt costs involved.
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