As human beings, we tend to be creatures of optimism. Significant resources are poured into our development with the hope of positioning us for better opportunities and prospects in the future. Even in our lowest of lows, when one has hit rock bottom, we tend to believe that somehow, we shall rebound, and things will get better, eventually. However, unlike bald eagles, which can (mythically), renew themselves by shedding their brittle beaks, dull talons, and heavy feathers, humans aren’t so blessed in their renewal characteristics. In addition to taxes and death, another (conditional) certainty that humans face is retirement, that is, if death does not intervene first.
The retirement topic has been dealt with from a multitude of disciplines. However, messaging to intended recipients and often complex mathematical models to explain the concepts around retirement and its related preparation tend to get lost in the jargon. This article shall discuss the topic of retirement from a consumer's perspective, focusing mainly on those elements that are entirely within the realm of their control. As a prelude, it would be prudent to present a few statistics to serve as a basis:
- Only 8.9% of the labor force in Sub-Saharan Africa is covered by pension schemes, and just 19.8% of people above statutory retirement age receive a pension, the lowest rates globally.
- In South Africa, which tends to perform better in pension schemes, only 6% of the population is on track to retire comfortably, according to the 10X Investments Retirement Reality Report 2023/2024.
While these two statistics may paint a bleak future, there are ways to change this chilling picture using the very human psychological traits mentioned in the introduction. As alluded to, humans tend to have a positive outlook on themselves. However, when it comes to retirement or pension, we tend to leave things to chance and less on design.
One of the concepts we can borrow is that of Future-Self Continuity. This concept refers to the degree to which a person feels connected to, identifies with, or cares about their future self: the version of themselves that will exist years or decades from now. It is a psychological construct that influences decision-making, particularly in areas like saving for retirement and long-term planning. A strong sense of future self-continuity means you see your future self as an extension of your current self, motivating you to make choices that benefit your long-term well-being. A weak sense of continuity can lead to prioritizing short-term gratification (often referred to as present bias) over future needs.
Priorities and economic pressures tend to add to the need to spend money in the now, on things that are either tangible or seen. This far outweighs the abstract concept of one being 60 years or 70 years old and needing an income. But still, amid those pressures and a (likely) knowledge that one is ill-prepared, humans remain ever optimistic that, come retirement, things shall work out for the better. Since this instinctive and toxic optimism is inherent in us, one of the ways it can be exploited is to use the concept of future-self continuity as defined above.
The following are a few strategies to use:
- Make the future self-vivid and relatable: Workers, especially young ones, are encouraged to imagine their future selves at retirement age (60+ years). Questions like: “Where do I want to live? What lifestyle do I want? Will I rely on family or savings?” should spring up in one’s mind and assist in decision-making. A healthy accumulated retirement benefit is a secure and independent way to reduce future reliance on family or limited state pensions (a country’s minimal social security), especially in light of increasing life expectancy.
- Immediate Benefits to Build Connection: Retirement consultants should highlight the immediate benefits of additional contributions to one’s pension fund. These additional contributions come with incentives that lower the taxable income. This psychologically makes these additional savings towards retirement, actually rewarding today.
- Success Stories: While personal finance matters are exactly that - personal - it would aid the course for retirees who benefitted from their pension fund savings, to share their stories. For example, small contributions of 300 rand per month (16 USD), growing at a modest 7% average return can be grown to over 700 000 rand by retirement and potentially able to buy an annuity of 5000 to 6000 rand per month.
These strategies and more can be combined to assist consumers in seeing their provident fund as a tool to empower their future selves, leveraging the power of future self-continuity to overcome economic and psychological barriers. As a parting shot, let me refer to a tool often used in the field of community development; The Theory of Change (TOC). At its core lies a fundamental question “What will success look like?”. The inputs are then filled using backward propagation. Similarly, within the retirement space, everyone must ask themselves this one small question; “What will my successful retirement look like?”.
Katleho Mphuthing ǀ Employee Benefits and Investment Consultant ǀ Minet Lesotho
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