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Paychecks and Playchecks

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Paychecks and Playchecks: You work hard for your money; make it work for you!

By Lisa Lewis

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Why is it so difficult to save for the future? It’s the conundrum that most 30, 40 and 50 year olds grapple with. I know my husband and I find it challenging. We, like many young(ish) couples, have a mortgage, two kids and are just starting to worry about retirement. The joys of turning 40!

The answer isn’t that we’re all short-sighted and greedy. Behavioural finance experts, Shlomo Benartzi and Richard Thaler, tell us that there are three main reasons why saving for those long-term financial goals – a comfortable retirement, educational savings for your children, wealth accumulation – is so challenging.

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Learn how to overcome human nature to save money for life’s important events, without having to give up the things you enjoy the most.

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The present bias

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Our brains are hardwired to focus on the present and near-future. Long-term planning is actually an unnatural act that requires outsmarting our brain’s natural focus on the ‘here and now’. Your intention may be to save $500 a month for the next 18 years so that your one year old can go to college. The reality? Summer BBQs are on the calendar, car payment is due, your vacation needs to be booked and summer camp fees are outstanding. You think to yourself: I’ll start the payment plan after the summer.
Our default is to indulge ourselves now while at the same time promise virtuous choices for our future selves (see Shlomo’s example of choosing chocolate over bananas in his 2011 TED talk titled “Saving More Tomorrow“).

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Inertia

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Inertia is also a powerful deterrent to long-term savings. When overwhelmed or confused (think about the process of selecting investment options, completing multiple forms and questionnaires, finding a financial advisor that suits your needs), humans would rather do nothing. Procrastination is common when effort is required.

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Loss Aversion

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Perhaps the most interesting insight is humans’ reaction to saving. Rather than view it as saving, we mentally and emotionally frame savings as a loss. This is because it means we can’t spend it now on things we want. The growing need for immediate gratification and affirmation compounds the issue, impacting our expectations and behaviours. How many likes did my recent status update on Facebook get? Who commented on my recent ‘selfie’? So why would our economic choices be any different that our social choices. In short, it’s getting even more difficult to save for a future that we are less and less focused on.

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So how can we overcome our natural biases?

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When I meet with clients, a large number of them are surprised at the future cost of college education, or how much life insurance they need to offset their current financial risks. The same also goes for retirement. Do you know how much you need to save to adequately prepare for retirement? According to Fidelity Investments, it’s at least eight times your final salary.

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While there has been much discussion about Bermuda’s pension plans recently, the bottom line is mandating contributions from both employees and employers has puts us in better stead for the future than many of our American cousins, where neither is required. But is it enough? Borrowing from the Saving More Tomorrow (SMarT) concept (Thaler and Benartzi), consider making voluntary contributions by pre-committing to increase your contribution rate at the same time you receive a pay raise. The result: your take-home pay doesn’t go down, but you’re saving more for your retirement. The added benefit to voluntary contributions is you are able to take this money out as a lump sum when you need to.

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Set up an individual prescribed pension account with your pension provider of choice, which offers you additional flexibility and diversification from your current pension plan or make voluntary contributions to your existing pension plan. This is as easy as talking to your HR department who will automatically deduct it from your pay.

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So What Now?

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In a recent survey of 400 random Bermudians, their number one concern was not saving enough for retirement. How can you ensure that your paychecks turn into playchecks at retirement? Talk to a financial advisor who will help you complete a financial needs analysis as a first step to determining your current financial realities, and how well these are aligned to your future dreams and financial objectives. Together you can develop an effective roadmap of the financial future for you and your family. Doesn’t it make sense to take a couple of hours per year to plan for the rest of your life!

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About the Author:

Lisa Lewis, BSc,
is a financial professional of BF&M. With over 14 years in the re/insurance industry, she helps advise individuals and families of how to relieve the burden of unexpected and long-term risks. Lisa can be contacted on 2980229 or llewis@bfm.bm.

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