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Saturday 31 October 2009

A Sideways Look At … Retirement

Retirement on the Psy-Fi Blog

For one reason or another retirement has figured large on PSB over the past few months. It’s probably my fixation about retirement being the main objective of stockmarket investing for most people. The idea of getting old is bad enough without the thought of being poor as well. Although on the bright side you can pretend to be deaf and then be rude to people all you like.

Anyway, here’s a brief summary of the Psy-Fi Blog’s thoughts on retirement …

Old? Prudent? You’ve Been Bilked!

The sheer scale and effrontery of the banks’ reactions to government bail-outs are enough to drive anyone to outright sarcasm …
"In fact it’s only non-working savers who will lose out and let’s face it, they don’t have much say in the matter anyway. It’s a small price to pay that we’re taking from the prudent to bail out the profligate but frankly most of these people are quite old and would probably have died quite soon anyway." >> Read More
Of course, providing you don’t eat very much, don’t require heating or shelter and can avoid healthcare costs you’ll probably be OK. Here in the UK we’re preparing to legalise euthanasia. This is almost certainly a coincidence. Probably.

The basic demographics of developed nations virtually guarantees that some nasty decisions lie ahead. Of course we can always agree to allow more immigration to pick up the slack of absent taxpayers. That’s always popular with electorates.

The End of the Age of Retirement

When Otto von Bismark introduced pensions it was on the understanding that most people would die before they got one. Unfortunately people promptly decided that if they were going to be paid to be old then they’d hang about to do so. That’s not quite so stupid as it sounds – there’s good evidence that people manage to delay their deaths to benefit from taxation changes.

Anyway, the average lifespan of a male in London in 1900 was only about 40, now it’s nearly double that. State pension schemes paying out today’s taxes to today’s pensioners are bust if you look at future liabilities. Future pension and healthcare benefits can’t possibly match the expectations of the middle aged and may not even see the already retired through safely. Pension ages are already increasing …
"For those of us in middle age there’s at least some time to take note of the demographic trends and prepare ourselves. Assuming that we’ll retire at Bismarck’s 65, pick up inflation protected benefits and be able to sell our houses for enough money to fund a golden age of cruises, holiday homes and golf club memberships isn’t very wise. Doing some sensible paying down of debt and investing in the stockmarket in a way that will guarantee capturing the maximum returns for the minimum risk is a better bet. " >> Read More
The only problem with this being that most people are more likely to chase the latest investing trend and lose their savings in hopeless gambles than they are to invest safely. In fact most people will simply fail to make a decision at all because it’s all too difficult. Usually they’ll go off and spend their retirement savings on some new clothes and a nice holiday rather than thinking about retirement.

Retirees, Procrastinate At Your Peril

The art of not making a decision, choosing short-term pleasure over long term gains and generally operating on the basis of tomorrow never coming is pretty much the status quo when it comes to retirement planning. Most people simply don’t get around to doing it because it’s not fun. Those who do often fail because they can’t decide what to do for the best, give up and go bowling instead:
"The odd, but inevitable conclusion, from this research is that when figuring out what to do about the tricky business of retirement investing people may never get around to doing it because it’s too important. It’s hard to know what’s worse – a mass of pleasure seeking, live for the moment hedonists ignoring their retirement problems because of lack of self-control or the responsible and thoughtful folks who are paralysed by analysis." >> Read More
Time to call for an expert advisor?

Disclosure Won’t Stop A Conflicted Advisor

Well, sadly not. Advisors only give unbiased advice if you pay them directly and most people don’t want to pay them at all. Advisors paid by commission on the products they sell will sell you the wrong thing. If they tell you that they get commission on the products they’ll do even worse stuff.
"Possibly the biggest problem, however, is that a disclosure of a conflict of interest by an expert often requires an expert to evaluate it. If you go to a doctor about a difficult medical problem and the physician tells you that you need an expensive drug but that she’s being paid by the pharmaceutical industry to plug it how do you respond? Does this disclosure help you make the decision or not?

Well, not, as it happens." >> Read More
So trusting advisors isn’t usually a good option, either. Perhaps we should learn how to invest for ourselves - better get some training.

Financial Education Doesn't Work

Only, it turns out, we're awful at learning about finance. When we do learn anything we usually end up drawing the wrong conclusions:
There is one type of training that does seem to improve the situation – the so-called stockmarket game in which students actively participate in their learning approach. This produces a 6 to 8% improvement. Researchers seem to be puzzled by why this might be the case but there’s plenty of psychological research around that shows how active involvement in learning situations improves student ability to use the training afterwards.

Regardless, the stockmarket game success turns out to be a pyrrhic victory because the successful students then go on to save less than their peers. The (unsubstantiated) hypothesis is that they learn that they can make up for failing to save by taking additional risks on the markets. Which is of course, what happens when you treat people like lab rats – they figure out how to get the cheese for as little effort as possible: proponents of ‘Nudge’ techniques beware. >> Read More
In fact the only thing that does seem to work is abandoning your sense of responsibility by opting out of the decision altogether.

Save More … Tomorrow

Yes, it’s been shown that the people who save most are the people who make a decision up front and then refuse to think about it. Being inherently lazy and utterly bored by the topic if we decide to invest an ever-increasing percentage of our salary in our pensions, increasing as our salaries increase, then we end up saving more than pretty much anyone else. It’s a rare case of behavioural finance actually helping us rather than pointing out exactly how stupid we are. Unfortunately there are likely to be downsides:
"As the same article points out, however, there is a problem in using these methods. We know that they work but we don’t know exactly why. And therein lies an issue, because when we nudge people in one direction we’re likely to find that although we may get the desired outcome, we may also cause them to do other things we don’t expect: consumers who save more for retirement in automatic schemes will be consuming less and buying fewer financial products, for instance." >> Read More
It Ain't What You Save, It's What You Do With It

Of course, many people will argue it’s what you do with your savings that matters, rather than the amount you save. Sadly the evidence is not on their side. The vast majority of people who try to think their way through the thicket of the investment jungle end up doing worse than a cross-eyed monkey armed with a set of darts and a copy of the Wall Street Journal.

Although, of course, the monkey’s more likely to use the paper for other purposes than investment. Still, that’s true intrinsic value for you …


  1. most people are more likely to chase the latest investing trend and lose their savings in hopeless gambles than they are to invest safely.

    This is too cynical, in my view.

    The reason why we are going to see million of failed retirements in the United States is that the studies that the "experts" have been using to help us plan our retirements get all the numbers wrong (they fail to consider the effect of valuations). The errors have been public knowledge for seven years now (I know because I am the one who first reported on them). Not one of the studies has yet been corrected. Is this the fault of ordinary people following :"the latest investing trend"?

    If you consider Passive Investing "the latest investing trend," then it is. But the reason why many people believe in this is that it is pushed so hard and so often and opposing viewpoints are so rarely voiced. The biggest problem today is with the "experts," not with the ordinary Joes and Janes (although the ordinary Joes and Janes are not blameless either, to be sure).


  2. Well considering this is the generation that ran up the simply incredible national debts with nothing to show for it - maybe they deserve to suffer and starve.