Articles
29 May 2018

Winning the retirement game

How much money should you save to have an income of €25,000 a year in retirement? Take a guess. Most people’s estimates are quite far off, so it’s worth facing the savings game head-on

The decision to save for retirement influences our wellbeing and happiness significantly as we age. Because we can go on for many years without making any changes to how much we save, this decision becomes all the more important. Research shows the inertia is so powerful; we don’t change our habits even after global events such as the financial crisis.

To aid our emotional, overconfident and sometimes distracted approach to retirement – here is a cheat sheet of behavioural hurdles that can be particularly problematic when it comes to creating a healthy nest egg.

Don’t play too confident

We tend to be optimistic and overconfident about managing our money. When estimating what we need to ensure financial well-being, we’re often off the mark (by quite a bit) According to one study, 34% of millennials believe they would need $200,000 to live comfortably after retiring. While in reality, to live on $40,000 per year for 30 years, you roughly need $1.18 million.

To tackle this overconfidence, a fresh set of eyes from someone without skin in the game can bring us closer to the mark. Also, try targeting a range rather than a single value because this gives you more flexibility and you’re less likely to feel you’ve failed if you don’t reach a specific number.

Keep your mind on the game

When faced with complex or important decisions, such as planning for retirement, it can feel as if all of our mental energy is being zapped and having a lot on your mind can be distracting and often results in sub-optimal choices. In an overloaded state, we tend to pick the simplest or default option, which might mean favouring a small return over a larger yield in the future.

So before making any rash decisions, give yourself time to think things through and save yourself from unintended outcomes.

Play your style

A preference for choosing round numbers can mean we can often pick arbitrary salary percentages to contribute to our retirement fund simply because the number is easy to remember or it sounds good at the time.

For example, a new graduate who chooses to contribute 5% of his earnings rather than 8% can have a difference in retirement savings of almost 60%, 40 years down the line, which can mean life-altering consequences.

Blow the whistle

It’s only natural to give priority to what we’re doing right now.

However, putting off planning for the future can cause inconvenience and financial loss down the track. Consciously making a retirement plan can be useful if this is a job that falls into the list of things to do tomorrow. Start early to maximise the benefits of a compounding savings pool.

Don’t get caught by the rules

The rules of saving for retirement require us to be forward-looking and give up spending now (because of present bias) so that we can spend later, but an aggressive retirement savings plan that eats up into our day to day spending can feel unfair.

Setting realistic goals and signing up for automatic contributions can help because you don’t have to remind yourself constantly, it happens anyway.

Recruit only when needed

We are social creatures, and other people’s actions have a strong effect on our behaviour. Trying to fit in with a generally accepted idea (even subconsciously) can result in herd behaviour, even when it’s not optimal.

Research shows that some people end up saving less when they find out how much more their peers save because of the upward social comparison. So, how one person approaches retirement may be very different from what is best for you.

Last the distance

Lastly, accumulating for retirement is a long-term and largely inactive process. However, setting up your nest effectively can mean a much better quality of life in your golden years. It might be useful to assess your contributions every now and make necessary changes if required.

The savings game is a marathon event, not a sprint, so play your best strategy.

For more articles on consumer economics, visit our sister-site ezonomics.com or subscribe to the newsletter here.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).