Oct 21, 2023  | Tags: jodie schroeder, retirement

Our insights

There is no better day to begin saving for retirement than today.

‘A penny saved is a penny earned’, an old proverb often credited to Benjamin Franklin, appears to have been first coined by George Herbert in 1633 with his observation, ‘A penny spar’d is twice got’.

The importance of saving rather than spending has been appreciated for hundreds of years.

But putting it into practice sadly is much more problematic for most.

It takes only the basic understanding of mathematics and economics to appreciate the power of the combined forces of astute investment and compounding.

But Australians are bombarded with a kaleidoscope of ways to spend rather than save.

Instant gratification and keeping up appearances multiplied by 'buy now, pay later’ platforms equals a financial death spiral.

That’s why behavioural sciences can assist people in making better choices.

Specifically, they help people understand what motivates them and the forces that pray upon them in society, so they can stop procrastinating about saving and begin making more informed financial decisions.

Let’s take a closer look at how it works.

The Procrastination Challenge

Australians are some of the world’s biggest procrastinators.

“She’ll be right, mate!” is a sentiment that has washed across generations.

Generally speaking, the average Australian is a laid back creature, happy to have a good time in the here and now and one who isn’t too bothered about tomorrow.

But the notion that things will take care of themselves is seriously flawed.

There are other reasons Australians put off saving for their retirement including:

Inheritance - the belief their parents’ money will eventually bail them out is a lazy and dangerous game to play. It doesn’t always go to plan. And how long will you have to wait?

Climbing the ladder - spending your pay rises on a more glamourous lifestyle is great now. But what happens if you lose your job? And do you plan to keep working forever?

Behavioural insights for early planning

Understanding the thinking patterns that encourage your brain to not save for retirement go a long way towards overcoming them and remedying the problem.

One of those notions is ‘time inconsistencies’.

It is basically an imbalance between what you would like your future self to do compared with what your future self actually does.

Let’s say you commit to start saving tomorrow.

But when tomorrow comes, you prioritise other things for your money – a holiday, a new car, whatever.

It’s basically the realisation that people prefer to spend their money immediately rather than save it for a potential greater reward.

This leads to the notion of ‘hyperbolic discounting’.

Also known as ‘personal bias’, it is the cognitive bias or personal decision to accept smaller rewards now rather than greater rewards in time.

Australians are particularly prone to it.

The sooner they can have the reward, the less they are prepared to accept.

It’s a concept that can be charted with a mathematical equation by hyperbola although it is more like a brick wall prohibiting many Australians from saving.

Nudges and anchoring bias

Behavioural economics recognises and utilises “nudges” as a useful tool in retirement planning.

Nudges are supposed to help us make better financial decisions.

One of the most powerful nudges built into Australian society is the superannuation guarantee.

From 1 July 2023, it requires employers to pay a minimum 11 per cent of a worker’s salary into superannuation.

It is a measure of forced saving which has essentially been deducted from the worker’s pay and sent to an account they cannot access until retirement.

But “anchoring bias” can work against people making sound financial decisions.

The concept recognises that people are resistant to change and new ideas and become fixated on the initial information they receive.

They then use that information as an “anchor” or reference point for all future ideas.

In terms of retirement saving, this may be counter-productive when personal circumstances or economic winds change.

Automated contributions

Automating contributions towards your retirement are one of the most powerful nudges and greatest weapons against procrastination.

Setting up your accounts to automatically invest on your behalf removes the thought process from the equation and the temptation to spend money now.

And because you never see it, you never miss it!

Automatic superannuation contributions are a particularly powerful tool because of the tax benefits.

Australians can add before-tax contributions of up to $27,500 per financial year – potentially even more over a five-year period – using the carry-forward rule.

There are other useful ways you can take advantage of automated contributions to save:

• Additional home loan repayments

• Share purchases and reinvesting dividend payments

• Savings plans

The power of visualisation

Visualisation is important whenever you are seeking a long-term goal.

It helps to crystallise in your mind’s eye what life will look like, in turn providing motivation to make better decisions to help achieve those goals.

Studies have proven that when it comes to retirement planning and saving, visualisation couldn’t be more critical.

Think about what you want your retirement to look like.

Do you want to travel, live by the sea or maybe spend time doing more of your favourite activities and hobbies?

You’ll almost certainly need financial freedom to achieve this.

And that means you’ll need to put steps in place now to make it happen.

Consider how much annual income you will need in your retirement years and how much you’ll need to save along the way to achieve it.

If it all seems too hard, try visualising what your retirement might look like if you don’t start saving.

Behavioural Economics and Australian Retirement Funds

Australian retirement plans and superannuation funds are designed to encourage early participation.

The earlier you opt in, the greater your nest egg will be.

Compulsory contributions dictate that workers begin saving for their retirement from their first day on the job.

And they do it to a fund they are unable to access until retirement.

It sends a strong message about the need to plan ahead and gives every Australian a vested interest in the shape of the economy.

But because it is automated, many people take a “hands off” approach to their superannuation.

It shouldn’t be a case of set and forget.

Not all superannuation funds are the same.

Industry super funds return profits to their members whereas retail funds direct them to shareholders.

And while all super funds will have a ‘default option’, that doesn’t mean there isn’t a better option for your investment plan.

Most super funds’ default options offer a balanced investment approach with a medium risk level.

But with their whole working life ahead of them, a young person may be better suited to a higher risk strategy.

Be aware too of ‘choice architecture’ which gives participants the ability to tailor their super to their own preferences.

While the choice may be yours, the architecture can be built in a way to ‘nudge’ you down a particular path.

That path may not be in line with your best investment interests and strategies.

Overcoming fear

Economic markets have fluctuated wildly since the pandemic with house prices and then interest rates and inflation all soaring.

It’s only natural to feel uncertainty about committing a significant amount of your savings to market forces, particularly if you are not well versed in economics.

Loss aversion is the desire to protect what we have and is often felt by older people closer to retirement.

Sometimes, that fear drives us to make poor financial decisions.

That may include becoming overly cautious or sometimes doing nothing at all which is called ‘status quo bias’.

In any investment portfolio, there must be a level of risk.

Ensuring that risk is commensurate with the reward and appropriate for your time horizon is key.

By adopting a rational rather than an emotional investment strategy, including diversifying assets to mitigate risk, investors can continue to grow their wealth and save for their retirement.

It will also help overcome another fear; FOMO – the fear of missing out.

Social influence and peer support

Like it or not, we are all influenced by our peers to some degree.

That influence may be positive or negative depending on who they are.

By surrounding ourselves with good role models who understand economics, we are more likely to make good choices about our investing and saving for retirement.

Don’t be afraid to reach out to trusted and learned friends and colleagues for suggestions or advice.

They can often have a worthwhile impact on how you save for your retirement.

Get advice today

Saving for retirement can seem overwhelming.

That is equally true for the young as well as older people who fear they are already too far behind the curve.

But the truth is it’s never too late to make a difference to your financial future.

Recognising and understanding some of the behavioural factors that influence how we view saving can help us make significantly better decisions.

So too can the help of an experienced financial planner.

That’s where Calder Wealth Management can help.

CWM are financial experts who can act as your financial mentor, helping you start your savings plan from scratch.

Or we can also run a discerning eye over what you already have in place, suggesting tweaks along the way as your circumstances or the economic climate changes. 

We’ll work with you to devise and implement investment strategies whatever your financial goals.

No-one should do without quality financial advice from someone personally invested in their wealth accumulation.

At CWM we pride ourselves on leading our clients into the future with structure, financial stability and confidence.

Contact us today to discuss all of your financial needs and concerns.

Written by Jodie Schroeder.

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.