Category: Savings and Investing

Solving for X

Posted on June 1, 2020 by - Savings and Investing

Sweaty palms, stomach-churning, head spinning, that choking feeling in the back of the throat. Few things in our everyday lives have the ability to send fear into the heart such as when we are confronted with complicated math. Especially when this math is in the form of a story or word problem. Those who suffer from math anxiety experience discomfort to varying degrees when confronted with math problems. For many of us, math anxiety is a very real thing.

Scientists have found that math stress has a biological effect on the body, including the release of stress hormones like cortisol, which are typically associated with the flight or fight response. Math anxiety can induce feelings of dread, nervousness, worry, confusion and inertia.

Sound familiar?

A lot of people have the same feelings about retirement savings and planning. Which makes a lot of sense because saving for retirement itself forces us to look at uncomfortable issues such as (budgets, mortality, legacy). Now add to this already emotionally-fraught subject a layer of complicated math.

Math is the default language of retirement savings and planning. Retirement planning is essentially one massive, multi-year story problem. But with greater consequences than just miscalculating at what time train A will arrive at the station.

Think about what people have to do. They have to calculate and strategize all kinds of math-based hypotheticals: You are age X, you need to save X percent of your current income, so that you can have X amount of replacement income (which is unknown) by the time you retire, (X age), assuming you will live until X (factor: gender, industry, genetics, social security, future healthcare, and inflation). All of which are unknown.

Once you have calculated your personal story problem, then you need to figure out your own risk tolerance, diversification strategies, retirement income needs, sources of retirement income and portability issues across multiple employers over your 35-year career.

We are using one anxiety inducing complicated technique — math — to explain another anxiety inducing complicated topic — retirement. If my math is correct, that is squaring the pain factor.

People know that in order to have a financially secure retirement they have to make a series of “right” decisions throughout the course of their lifetime, decisions like: how much to invest, where to invest, what to do and when to do it. The stakes are high, and the correct answer is illusive. This all leads to people having very little confidence in their own ability to make good financial decisions. It takes a great deal of financial courage to face all of these issues.

To help illustrate what I am talking about — the overreliance on math to explain retirement savings — I typed into Google the following phrase, “how much income do I need in retirement?” Below is what comes up as the first response, which is from one of the largest 401k provider’s websites:

“How much do I need to save for retirement?

Savings factor: Aim to save at least 1x your income at 30, 3x at 40, 7x at 55, 10x at 67.”

“That’s why we did the analysis and came up with four key metrics: a yearly savings rate, a savings factor, an income replacement rate, and a potentially sustainable withdrawal rate to help you create your retirement roadmap. (See chart.)”

Here is another example:

“Financial experts estimate that the average person, after it all nets out, will need about 75 percent to 80 percent of their preretirement income to sustain their standard of living after they retire. But this is just a rule of thumb. Do your research, and then do the math to see how much retirement savings you need.”

These examples are typical of information that people saving for retirement are confronted with on a regular basis. (The jargon in these two examples is a whole other story).

Relying on math as a rational element or lever for behavioral change is not an effective strategy for most people. Look no further than all of studies from behavioral economics on irrational behavior. In fact, behavioral economics is founded on the idea that rationality is a preposterous assumption. Math requires measured rational thought — we tend to become irrational when we are presented with emotionally charged issues, like our retirement.

I will put my hand up and confess to say that I have math anxiety — despite the fact that I work with math all day — it still leaves me feeling a bit sickly when I am confronted with anything beyond simple arithmetic.

In order to help people save more and improve outcomes, we need to replace anxiety with confidence, doubt with trust, and help reduce complexity wherever possible.

I propose we move away from the language of math, and start to introduce new ways of communicating complicated topics. We can rely on methods that have worked over the course of human development. For example: replace story problems with storytelling, and replace histograms and complicated charts with visual language that simplifies rather than mystifies.

Let’s take out some of the unnecessary anxiety. By doing so we will start to see more confident and engaged savers.

The Gender Gap in Retirement Savings

Posted on June 1, 2020 by - Savings and Investing

The cost of being a woman can now be quantified into one terrifying statistic: women are 80 percent more likely to be impoverished at age 65 than men. That’s according to this report from the National Institute on Retirement Security. How have we arrived at a time when our mothers, grandmothers, sisters, and friends are facing a future of geriatric poverty? I’m not suggesting there’s a simple answer, but one thing is clear: The current retirement savings system isn’t working for many women.

This current system requires that you have access to a workplace retirement savings plan like a 401(k). These retirement plans can be very effective because they allow high rates of savings, provide matching contributions from employers, diverse investment options and most importantly a structured retirement savings environment.

However, 75 million people don’t have access to these workplace retirement savings plans — and the majority of those people are women.

This is a massive problem. Without access to a workplace retirement plan, only a fraction of Americans will set up a retirement plan like an individual retirement account or individual 401k on their own.

And here’s why.

Self directed IRA’s and other retirement savings plans essentially require that you become your own pension manager, something few have the skills to do. Think about it: you must construct a retirement plan, select your investments, allocate your assets, and implement your own diversification strategy for over forty years.

Overwhelmed? You’re not alone.

This is not easy for anyone. Both men and women struggle with do-it-yourself investing decisions. But for women — both those who are covered and those who are not — we face additional challenges and barriers around saving money:

  • Women earn 79 cents for every dollar men earn.
  • Women are more likely than men to take off time from work to raise children, which results in extended periods of no earning, no coverage, and no contributions to IRA’s and 401k’s.
  • Women live longer than men (81.2 years versus 76.4 years) which means they require 5 more years of retirement savings.
  • Women are more likely than men to have unexpected extraordinary medical costs.

These are just a few of the reasons that we must worry about our financial futures. There are more.

We’re in the middle of a shifting job market — the US is moving away from traditional employment to more independent contractors and “gig workers.” It is estimated that by 2020, as much as 40 percent of the workforce will not have a traditional employee-employer relationship.

And based on current trends, this estimate will soon be the reality.

A recent report from Harvard and Princeton professors shows that all net employment growth in the past decade came from alternative work arrangements, not full-time jobs.

This shifting labor market will further distance women from retirement plan coverage and will worsen their long-term financial security.

A common misconception is that women don’t save enough. But given the chance, they nearly always do.

In fact, Vanguard, one of the retirement savings industry heavyweights, illuminates this point: “When women are given the opportunity to participate in workplace savings plans, they save at higher rates than men at all income levels.”

Knowing that the retirement savings system isn’t working for us, what can we do? We need a new retirement savings plan — one specifically designed for the uncovered workforce.

We need a new retirement planning system that resembles our current 401(k) system, but that that is easy to use, fairly priced, and high quality. Of course, it must also address the simplicity and portability needs of our shifting 21st-century workforce.

Lack of retirement savings is quickly becoming one of the biggest social challenges of our generation with a far-reaching impact on individuals, their families, communities, and our country.

We must look at the retirement savings crisis through the lens of gender because it allows us to start developing and designing retirement savings solutions that address the barriers, and to start to change these unsettling statistics.