Why Is It So Hard to Save?
No matter how good an investor you think you are, at some point or other you will fall prey to the fallibility of human nature.

Why Is It So Hard to Save?

Angela Pasceri – experienced journalist
(Article is provided by Manulife (International) Limited)

No matter how good an investor you think you are, at some point or other you will fall prey to the fallibility of human nature. In a nutshell, based on our evolutionary past our brains are not programmed for this type of emotional behavior, but this is not to say that we cannot teach ourselves to ignore tens of thousands of years of evolution.

Enter the study of behavioural finance, a relatively new discipline that complements classical economic theory, explaining how at times – or in some cases most of the time – investors can act illogically. The aim is to recognize when our behavior is not in our best interest, and to identify and understand certain common and predictable errors.

When it comes to retirement planning the decision to save is often sabotaged by what behaviorists call bounded self-control, or in layperson’s language lack of willpower, where investors either prove to be limited in their capacity or desire to execute intentions. To put this into perspective, saving for retirement requires actions similar to those undertaken in other behavior modification instances such as exercising, dieting, quitting smoking or following through on New Year’s resolutions. Not easy is it.

What’s behind this behavior? According to researchers, peoples’ near-term discount rates are much higher than their long-term discount rates, where they have greater patience for long-term returns and are willing to wait, but not for short-term returns. So if in 10 days they could have $10 or in 11 days $20, people would wait 11 days to get $20. But if the decision shifts to the present, patience is strained and people would rather have $10 today than wait for $20 tomorrow.

Understanding this weakness, American behavioral economists Shlomo Benartzi and Richard H. Thaler coined the phrase “Save More Tomorrow” or SMarT. This prescriptive savings program quite simply requires that people commit in advance to allocating a portion of their future salary increases toward retirement savings. Thus, if you receive a 4 per cent salary increase, allocate 3 per cent to savings and enjoy a 1 per cent rise in spending. Do this every time – save three percentage points or more every time you get a pay raise (without thinking about it) – and the results will speak for themselves. In one of the first studies testing this theory, Professor Benartzi notes over a three and a half-year period and four pay raises, people who were struggling to save, saved 3 per cent of their paycheck, and three and a half years later were saving almost four times as much, nearly 14 per cent.

Wakeup Call
Fear of hardship is one of a number of triggers that motivate people to start planning for retirement when something happens to them or people around them. Recent Manulife research1 looking at investor sentiment identified five wakeup calls which suddenly give people a need to consciously and deliberately plan.

1. A change in life stage or encountering a life event
Event: Getting married; buying a flat; having a child; resigning from a career
Response: Consideration (of one’s future)

2. Own or family hardships
Event: Seeing one’s parents continue to work past 60; no access to immediate or better medical treatment; living in a less well-off family
Response: Preparation

3. Seeing/hearing hardships of other people
Event: A friend or family member suddenly falls ill, requiring costly care and time off work
Response: Prevention

4. Instability in Hong Kong’s financial market and economy
Event: Hong Kong market influenced heavily by external factors (US, China, Europe); fluctuations and unclear trends in property market; rising inflation and cost of living
Response: Protection

5. Government limitations
Event: Realisation MPF alone is insufficient for retirement; lack of government pension; costly housing; waiting list for medical treatment in public hospitals
Response: Self-reliance

…With a little help
“It’s human nature as you get older to start worrying more about things but it also comes down to each individual’s character, personal experience and family history says Sheila Dickinson, Senior Wealth Manager at The Fry Group. “I have some younger clients who have seen the traumas that have happened to their families due to lack of planning that has driven them to start planning earlier.”

“The most important part of financial planning is spending less and saving more,” Dickinson adds, noting that getting into the habit of saving a percentage of earnings requires a disciplined approach and makes the biggest difference to the overall retirement planning. To keep her clients on track, she works with them on an overall financial plan beginning with basics, looking at budgets; where savings can be made; what their objectives are; and what they need to plan for in the short, medium and long term. Once the plan is in place she becomes the enforcer making sure they stick to it through regular reviews of the plan on a bi-annual or annual basis. In cases of unexpected events, during the review adjustments are made to the plan.

Can you change? Yes. The cognitive mistakes can be neutralised through a clear cut methodology that will prevent you from making emotional decisions. You can learn to recognise the common mistakes and at the very least stop and rethink that decision. Although emotional responses to retirement decisions will never go away, we can learn how not to react to them if we are able to identify the pattern when it is happening.

1Manulife customer focus group research on retirement conducted by TNS in March 2013


Why Is It So Hard to Save?

Angela Pasceri – experienced journalist
(Article is provided by Manulife (International) Limited)

No matter how good an investor you think you are, at some point or other you will fall prey to the fallibility of human nature. In a nutshell, based on our evolutionary past our brains are not programmed for this type of emotional behavior, but this is not to say that we cannot teach ourselves to ignore tens of thousands of years of evolution.

Enter the study of behavioural finance, a relatively new discipline that complements classical economic theory, explaining how at times – or in some cases most of the time – investors can act illogically. The aim is to recognize when our behavior is not in our best interest, and to identify and understand certain common and predictable errors.

When it comes to retirement planning the decision to save is often sabotaged by what behaviorists call bounded self-control, or in layperson’s language lack of willpower, where investors either prove to be limited in their capacity or desire to execute intentions. To put this into perspective, saving for retirement requires actions similar to those undertaken in other behavior modification instances such as exercising, dieting, quitting smoking or following through on New Year’s resolutions. Not easy is it.

What’s behind this behavior? According to researchers, peoples’ near-term discount rates are much higher than their long-term discount rates, where they have greater patience for long-term returns and are willing to wait, but not for short-term returns. So if in 10 days they could have $10 or in 11 days $20, people would wait 11 days to get $20. But if the decision shifts to the present, patience is strained and people would rather have $10 today than wait for $20 tomorrow.

Understanding this weakness, American behavioral economists Shlomo Benartzi and Richard H. Thaler coined the phrase “Save More Tomorrow” or SMarT. This prescriptive savings program quite simply requires that people commit in advance to allocating a portion of their future salary increases toward retirement savings. Thus, if you receive a 4 per cent salary increase, allocate 3 per cent to savings and enjoy a 1 per cent rise in spending. Do this every time – save three percentage points or more every time you get a pay raise (without thinking about it) – and the results will speak for themselves. In one of the first studies testing this theory, Professor Benartzi notes over a three and a half-year period and four pay raises, people who were struggling to save, saved 3 per cent of their paycheck, and three and a half years later were saving almost four times as much, nearly 14 per cent.

Wakeup Call
Fear of hardship is one of a number of triggers that motivate people to start planning for retirement when something happens to them or people around them. Recent Manulife research1 looking at investor sentiment identified five wakeup calls which suddenly give people a need to consciously and deliberately plan.

1. A change in life stage or encountering a life event
Event: Getting married; buying a flat; having a child; resigning from a career
Response: Consideration (of one’s future)

2. Own or family hardships
Event: Seeing one’s parents continue to work past 60; no access to immediate or better medical treatment; living in a less well-off family
Response: Preparation

3. Seeing/hearing hardships of other people
Event: A friend or family member suddenly falls ill, requiring costly care and time off work
Response: Prevention

4. Instability in Hong Kong’s financial market and economy
Event: Hong Kong market influenced heavily by external factors (US, China, Europe); fluctuations and unclear trends in property market; rising inflation and cost of living
Response: Protection

5. Government limitations
Event: Realisation MPF alone is insufficient for retirement; lack of government pension; costly housing; waiting list for medical treatment in public hospitals
Response: Self-reliance

…With a little help
“It’s human nature as you get older to start worrying more about things but it also comes down to each individual’s character, personal experience and family history says Sheila Dickinson, Senior Wealth Manager at The Fry Group. “I have some younger clients who have seen the traumas that have happened to their families due to lack of planning that has driven them to start planning earlier.”

“The most important part of financial planning is spending less and saving more,” Dickinson adds, noting that getting into the habit of saving a percentage of earnings requires a disciplined approach and makes the biggest difference to the overall retirement planning. To keep her clients on track, she works with them on an overall financial plan beginning with basics, looking at budgets; where savings can be made; what their objectives are; and what they need to plan for in the short, medium and long term. Once the plan is in place she becomes the enforcer making sure they stick to it through regular reviews of the plan on a bi-annual or annual basis. In cases of unexpected events, during the review adjustments are made to the plan.

Can you change? Yes. The cognitive mistakes can be neutralised through a clear cut methodology that will prevent you from making emotional decisions. You can learn to recognise the common mistakes and at the very least stop and rethink that decision. Although emotional responses to retirement decisions will never go away, we can learn how not to react to them if we are able to identify the pattern when it is happening.

1Manulife customer focus group research on retirement conducted by TNS in March 2013