How to save for retirement

Last week, I had an interesting conversation with a friend who is in his fifties. He recently realised that he has not saved enough for his retirement.

He jokingly remarked that his son was his retirement investment! Fortunately, my friend is skilful and can work past 60 if he wants to. But the point is that many of us do not save enough for retirement. Why?

Consider this. You are invited to a party, which is loaded with junk food. You would love to indulge but your doctor has advised you to reduce weight.

What will you do? If you indulge, you are just one of the many who do not have self-control. Why do we find it difficult to resist temptation?

We are always at war inside our head, our present-self fights with our future-self. And our present-self often wins. The reason is not far to seek.

Suppose you are offered cola, chips and pizza. The fact is that your present-self enjoys such food. And your present-self cannot gauge the impact of such food on your health, because the after-effects are typically felt sometime in the future. So, you discount the future.

That is, today's pleasure is more important to you than the pain in the distant future. Your future-self loses the war.

TODAY VS TOMORROW

The behaviour is the same when it comes to saving for retirement. The war in this case is between current consumption and savings.

You can either have a good lifestyle today. Or cut your current lifestyle to save for the future. We typically choose to have a good lifestyle today!

Fortunately, research in behavioural finance suggests that people can be nudged to save more. In one experiment, subjects were divided into two groups.

One group was shown a virtual image of how they will look in old age. The other group was shown young faces resembling themselves.

Both groups were then given some money and asked to allocate the amount among several alternatives including spending and retirement. The group which saw their older-self allocated more money towards retirement than the other group! Why?

We tend to save less because we are emotionally detached from our future-self and, hence, from saving for retirement. The experiment made the subjects look at their older-self. And that triggered their emotions, prompting them to save more.

While you cannot virtually see your older-self, you can make friends with old people just to understand the problems faced by retirees.

That could, perhaps, prompt you to save more. But be sure to set-up auto-debit facility to channel your savings; for if you stop relating to your older-self, you may not save enough!

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