Working notes on long-term saving, some of which is from the perspective of what my bank account could do for me.
Retirement planning today: lagging
Demographic stats: we’re living longer, and the % alive in UK is skewing to retirees, so it’s safe to expect State Pension to drop in real terms and Defined Benefit employer pensions to go away. Stats on retirement numbers show there’s a gap:
- 12m working age people in UK face inadequate retirement income. “More than half of people in the UK either aren’t saving at all for their retirement or they aren’t saving nearly enough to give them the standard of living they hope for when they retire”. 15% of UK adults have used a payday loans service [MAS]
- 80% of Millenials (18-34) see themselves as responsible for ensuring they have an income in retirement, yet just 44% currently hold a pension. 21% of people (34% of Millenials) would invest more in their pension if they knew exactly where the funds were being invested [OnePoll/Abundance 2015]
- Since 2014 pension reforms, income drawdown contracts up 64%, annuities down ~75% [ABI]
- USA: 50+% of US households won’t be able to afford their current lifestyle when they retire [Northwestern Mutual], and one in three Americans have taken no steps to plan for their financial futures [NYT]. 33% US households have an IRA (pension), but 41% of households age 55-64 have no retirement savings, however 47% of 18-29s have some retirement savings [GAO/Fundreference].
Changing market/demographic context:
- For banking/investment incumbents: 7-day switching (interest paid and customer service attracting switchers), new banks, digital-first banks (Atom et al), PSD2, bank unbundling. Passive and semi-passive robo-advisors are taking AUM from managed/active funds, forcing fund pricing down.
- UK gov policy: squeeze on saver tax breaks 2014-2016? BTL squeeze 2015 may change attitude to property as investment?
- Demographic: baby boomers in retirement, Gen X are mid-career. Do millenials trust robos? Do they see banks as boring? non-aligned to their interests?
Why are we late savers?
We know we should look after our futures, but what explains the gap? My speculation:
- Complexity, distrust causes inertia: “I know I should but… it’s all too complex, where to get info, who to trust… what to do…”
- Urgent things displacing important but not urgent things: “I know I should but… there are priorities here and now″ Today vs tomorrow. Save for a house deposit. Student debt. Holiday vs pension.
- UK property will save the day? Easy to just rely on the house - trust property because it’s tangible, “always” goes up (more so in London?)
- We’re “wired for imprudence” [RSA]. Many other cognitive biases, but might summarise their effect as: the timescale, the complexity and the psychology make us think “I’ll get to that later when I have more time and have dealt with these really urgent things”.
- Fear: Job security/(perma)austerity?
- Fear: I just don’t want to think about getting old, about mortality. Need a personal finance Memento Mori?!
- Growing cohort that are self-employed may have less predictable income which makes it harder to plan ahead?
Start safe, now:
- a safe start that’s directionally correct is much more important than a perfect start. Optimise later.
- a Fear call to action: “Look at that scary salary drop when you retire!” - not many orgs doing this; perhaps fear isn’t well correlated with spending money on a finance product?
- a Greed call to action: “Look! Your savings could grow this much over period” - Nutmeg etc fairly good at this. Power of compound interest.
- Vanguard Lifestrategy and then forget about it
- One-click. What if a bank sent me the ISA forms pre-filled, told me how much it could put in it right now, how much it could automatically sweep into it every month based on my history, and asked me solely for a wet signature?
- Setting a goal. How we think about money. Why money’s important to us.
- Rather than economics lessons, useful guidelines, rough and ready measures
- Progress toward long-term goals rather than “your portfolio is down 0.02% today”
- Priorities: generally pay off debt before saving (but always exceptions, eg the return from your employer’s contribution to your SIPP pensions is significant)
- Different language
- Salary as the return from a time-limited asset, your working life/human capital. Remind me that at 40-something I might be in the second half of my working life in years, though hopefully not in earning potential. My job is to gradually turn human capital into asset capital.
- A mortgage is money you’re renting from the bank (time value of money). A credit card = “I value 70p now more than I do £1 next year”.
- Creating “floors” to make the worst case impossible?
Form good habits:
- Incremental learning about saving: “send money away” (ie save) monthly and see it come back larger (Santander123 statements are quite good at making this visible). Then do the same quarterly then annual then …, each time showing how longer commitments generally mean a better future return.
- Improve the visibility of your personal money, eg Sweep. Compare your Sky TV DD to a critical illness DD. Ways of showing cost that might trigger a better habit (£7 bottle of wine every night * 7 days = 2.5k+/year = holiday/goal/something = OK now I’m motivated)
- Using the data: comparing my account to those of others similar to me might be a step too far. But compare me to myself this time last year. Categories for history, and buckets for future:
- Sub-account level “buckets” (holiday, wedding, tax, like Briqs with goals, progress (33% of the way there). And show me how effective I am (“that 9,999 car only cost you 9,300”).
- Categories of expenditure, but compare my history
- Sizing: Your Amazon + Sky spend is now X% of your Tesco spend
- feeling noble about delayed gratification - habit feedback loops
Avoiding bad habits?:
- the unhelpful effect of stock portfolio apps on investing behaviour: the real-time red and green ticking up and down encourages you to act now, to buy or sell
- really, investment portfolio apps should look more like banks account apps: just show me the headline balance and the progress towards a target
- and vice versa: online bank accounts should look more instrumented - like stock market investing apps!
Convenience - simplify/automate:
- automated: direct debits. We don’t look at the Sky TV/car loan DD every month (a bad thing?), nor the pension contribution/critical illness payment (a good thing?).
- invitation to automate: anything reversible could just be automatically done or “click here and we’ll make it so”. Do it transparently, with a safety margin, and in a reversible at-no-cost manner.
- Convenience - Digit or Qapital: move “spare” cash into a savings account
- Why can’t we have Santander789?: instead of interest and cashback into my current account, why can’t my bank move it into a paired ISA, SIPP or something else more long-term? Perhaps True Potential Investor is getting close to this.
(Other things to investigate:)
- trust your family: “offset” retirement plans to manage debt of younger members vs savings of older? Could a co-operative do this?
- What does instant/delayed gratification look like when mapped onto Maslow?
- Banking apps and stock market portfolios should really look like each other!
- Why isn’t there a button on my online banking to download a self-assessment tax statement?!
- How can I be a trusted advocate for a friend or family member. Digital powers of attorney? (Security challenges everywhere, esp in emergency use cases!)
- What would make my bank much more trusted?
- On human capital and entire household balance sheet: here, here and here.
- Dig into these: World Bank Global Findex and here. Annuity map of UK via this. On UK bank switchers.
Sources for the numbers