Retirement income in our control

I like to start the year by encouraging readers to review and refresh their financial goals for the coming year but I have been distracted.

In a recent Otago Daily Times article (January 25-1-2020) titled “Ready for anything — preparing for the apocalypse”, Bruce Munro laid out numerous doomsday scenarios that could potentially beset us: economic, political, natural, environmental, military, technological, social, climatic and extra-terrestrial.

As Bruce observed for each of these risks “there is someone who will tell you that it is inevitable, imminent, inescapable ... and that you should be preparing for it”. And this is before I started worrying about the coronavirus.

The question I have been asking myself is: why do we allow matters that we have no or very little control over have such an influence on our behaviour? And when saying “influence on our behaviour” I really mean they cause us to choose the path of inertia and opt to do nothing. To make matters worse, “paralysis by fear” also appears to have an evil twin; the seduction of pessimism.

Pessimism appears to be intellectually more seductive than optimism. Hearing that the world is “going to hell in a handbasket” is more interesting (and hence the basis of many an internet tagline) than forecasting that things will gradually get better over time, even if the latter is accurate for most people most of the time. It can be hard to distinguish pessimism from critical thinking and is often taken more seriously than optimism. For example, Y2K received more attention than any individual tech company.

In evolutionary terms this pessimistic tendency probably makes sense. Behavioural economist Daniel Kahneman once wrote: “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce”.

However, inertia through fear or being overly pessimistic does not generally provide a sound basis for making investing and financial planning decisions.

Last week, interim Retirement Commissioner Peter Cordtz made an interesting comment. When delivering the recently released report on the 2019 Review of Retirement Income Policies, he surprisingly suggested that we should stop talking about the need to move the age of entitlement to superannuation from age 65 to 67.

He expressed concerns that discussion about the rights or wrongs of such a change are distracting and inadvertently stopping individuals (and policy makers) from taking action in areas that are entirely within their control.

In an earlier column I referred to research that shows that the three most important determinants of wealth at retirement from your regular savings programme are (in descending order): your asset allocation, your contribution rate and manager performance.

One of the key points the commissioner was making is that the two most important factors that will influence how much money you have at retirement are entirely within YOUR control. These are the matters that individuals should be focused on not when superannuation may or may not start.

For all of us there are times in life when maintaining perspective can be difficult. The very real risk here is that at these times the loss of perspective can often lead to poor decision making.

One of the key benefits of working with an adviser to develop a well-considered financial plan is that it provides a reference point to help guide and assist in decision making.

Research has shown that an advisory relationship will increase the likelihood that you will achieve your stated financial goals and also help ensure that this is achieved in a way that is consistent with your own personal values.

Your plan is not just critically important at the start of the investment process but should be updated on an ongoing basis to maintain its relevance. When used in this way the plan offers much more than just a set of investment recommendations; it will help you maintain perspective and ward off the effects of negative media and our evolutionary bias towards pessimism.

Peter Ashworth is a principal of New Zealand Funds Management Limited, and is an authorised financial adviser based in Dunedin.


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