From an early age, we've all been taught that learning to save is a good life skill. Our parents taught us to set aside 10 per cent for saving and 10 per cent for charity. It seems, however, that once the kids grow up, they reject this practice and spend, spend, spend. What happened to that teaching?
In a comprehensive international survey of 15,000 people, age 25 and older, HSBC found that 48 per cent have never saved for retirement with more non-savers in high-income countries like Canada, U.K. and U.S.A. Furthermore, when asked what they would prioritize if they could only save for one thing, 43 per cent of people would save for a vacation before retirement. Yet, despite these choices, people acknowledge the importance of saving for the future. Research conducted by TD Canada Trust found that 70 per cent of Gen Xers (1965-1981) feel that they are not saving enough money and 56 per cent of boomers (1946-1964) are worried about not having enough money in their later years.
What is contributing to these concerns? HSBC's research found that 84 per cent of people stated that a life event affected their ability to save with another 26 per cent being impacted by the economic downturn. Saving for a child's education or buying a home are major obstacles to saving. Yet, saving for a child's education can begin at least 15 years before college or university. Home ownership has become a default position with consumers sacrificing financial security in order to carry large mortgages. Furthermore, as John Tracy, Senior VP of TD Canada Trust says, when people can buy a home with a 3 per cent mortgage, money feels almost free.
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Retirement is changing but many Canadians are not ready for retirement because they can't afford it. Many report that they haven't saved enough money in their RRSPs, TFSAs or even a savings account.
Not because you have to, but because you want to. Canadians are downsizing from bigger family homes to smaller condos or houses. This means they can get some cash from the sale and have a small space that is easily managed.
These days retirement doesn't mean staying in one space or even decamping to Florida. Canadians are choosing to live in cheaper parts of the country or even in warmer countries where their money can stretch a little further.
The age of company pensions is long gone but Canadians are waking up to the fact that they need to take responsibility for their own retirement. This means educating or hiring the correct people to steer their retirement planning.
Canadians are using their retirement to start small businesses. A recent survey found that more than half of boomers are considering or have started a small business.
In the old days, retirement came with a party, a gold watch, and hugs goodbye as the retiree disappears out the door. Now companies are doing "phased retirements." Benefits Canada reports that some companies such as Telus have plans where people can gradually reduce hours, collect their pension and still contribute their knowledge to the companies.
Canadians may be retiring but really they're cutting back their hours, working part-time or consulting.
The Federal government may have increased the retirement age from 65 to 67 but even then, Canadians are delaying retirement to stay socially connected and active in their communities and workforce.
Then, there are those things which people view as needs that are really wants. As Costco CFO Richard Galanti notes and what any Costco shopper knows to be true: "People are eating in more and looking for fresh food, which, along with [our] low gas prices, is what are driving people into our stores more often," he said. "Then, once they are inside, they pick up a sweater or a new television." Retailers count on this and consumers fall right in line. As consumers, we are very skilled at rationalizing what we do, including our impulse purchases.
Academic Richard Wilcox has written a book about why Americans save so little. In Whatever Happened to Thrift, he outlines some of the key socio-economic and psychological components to the lack of savings. He finds that cheap money, keeping up with the Joneses, American optimism (what I call blind optimism), and a misunderstanding of compound interest combine to create a spending culture. These factors are powerful and pull people towards a spending mindset, reinforced by people and messages around us. Yet, these are irrational and emotional factors, both of which lead people to make poor financial decisions. The consequences for not saving are serious as the millions of baby boomers are about to find out. Many will fall short of their required funds and realize that optimism isn't going to pay the bills.
What are the solutions? John Tracy of TDCanada Trust and Ron Wilcox agree on the strategies.
1. Start small and make it automatic. Let mental accounting work for you. As John Tracy describes it, you should deduct a regular amount automatically from your paycheque so that you never see it. In this way, you can trick yourself into believing you never owned it and therefore you don't miss it. Once you set up the habit of saving, it becomes routine and a part of your money mindset.
2. Be smart about investing. I don't mean you need to take investing courses and predict the market (nobody can do that -- no matter what they may claim). However, you need to understand the basics and to understand your own emotional reactions to investing and saving. Understand the impact of fees and learn to ask the right questions.
3. Understand your psychological and emotional blind spots. Ron Wilcox refers to psychological anchors. We anchor when we make decisions based on what is right in front of us, by what our friends our doing and what we hear about. Anchors make it easier for us to make decisions but they can be arbitrary and are not subject to our analysis or evaluation. The risk is that we leave ourselves vulnerable to decisions that are in the best interest of the person giving us advice. They won't care about your money as much as you do.
4. Teach your children well. Our relationship to money starts at home and with the messages our parents give us. The most important message parents can send to children is to model responsible money behaviour. Handling money well is a life skill that your children must have. It starts with you, the parent. If you don't manage your money well, it's time to make changes. You don't want to leave your children with a legacy of debts, insecurity and a need for external acknowledgement of worth.
And the final word goes to John Tracy of TDCanada Trust. "Bottom line- have a conversation. Educate yourself -- become self-sufficient. Finally try to overcome your desire for immediacy and immediate gratification." It will be worth it.
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