Small daily steps to set you up for retirement

The Street

Here's one thing you can do daily to set the stage for a secure financial future.

Transcript

00:00What's one thing people can do every day, presently, to help set themselves up for retirement?

00:07So, a couple things. One is, you know, make sure you're saving. But also, you know, saving for what?

00:12And, you know, the thing that I like to think about is, okay, it's one thing to have a pile

00:17of money. It's also another thing to calculate what your expenses will be in retirement. So,

00:22for instance, imagine that you have no paycheck anymore. And what you need to do is say, well,

00:29how much do I need to accumulate in order to fund 30 years of housing expenses, 30 years of

00:34transportation expenses, 30 years of insurance, 30 years of taxes? Where's that money going to

00:40come from? Will it come from a 401k, from a Roth IRA? Will it come from Social Security? Am I lucky

00:45enough to have a defined benefit plan? And so, you need to really think about, like, what do you have

00:50and how is that money going to be spent? And then the second thing I would sort of mention is

00:55retirement. I always think about planning for retirement as it's all about the rewards,

01:00right? I'm saving money to accumulate a big nest egg of money. I think about retirement

01:05differently. I think about retirement as all the risks that you'll face in retirement. So,

01:09the Society of Actuaries, for instance, notes that there are at least 15 risks that people

01:13will face in retirement. They include things like longevity risks, inflation risks, sequence

01:18of return risks, death of a spouse, change in housing needs, etc., etc., etc. So, I think people

01:23not only need to think about what expenses they'll face in retirement, but how will they manage and

01:28mitigate all these different risks that they'll face? And the tools that you'll use to manage and

01:32mitigate some of these risks will be different. So, I mentioned inflation risks. Well, you might

01:37want to make sure that you're investing in stocks to keep pace with inflation so that you won't

01:41experience a decline in your standard of living. On the other hand, longevity, the fear of outliving

01:47your assets, is a very real risk that you'll face too. Equities, investing in stocks, doesn't always

01:53manage and mitigate that risk, but things like annuities, income annuities, QLACs, deferred

01:57income annuities, those are tools that you could use to manage the risk about living your assets

02:02or the risk of longevity. So, think about, just to summarize, you know, think about your expenses in

02:08retirement carefully, and then think about the risks that you'll face in retirement and what

02:12tools you use to manage and mitigate those risks. So, give us the benefit of hindsight. What do you

02:19wish you knew about retirement when you first started your career? Well, so, one of the things,

02:25you know, it's become very popular to talk about in the financial planning profession these days

02:30is what are the behavioral biases that people have as they think about saving for, investing for

02:36retirement. And one of the terms that is probably unknown to many people is something called present

02:42bias, which refers to the tendency of people to give stronger weight to payoffs that are closer

02:47in the present time when considering the tradeoffs between two future payments. So, for example,

02:52if, Conway, I was to offer you $10 today or $15 tomorrow, if you were to choose the $10,

03:00you would be, you would have something called present bias, which is being valued that money

03:04more today than you do tomorrow. On the other hand, you know, it's quite possible if I was to say to

03:09you, Conway, I'm going to give you $10 a year from now, and then I'm going to give you $15 a year and

03:14a day from now, you might say, well, waiting the extra day is worth it. People need to understand

03:20what their biases are, especially as it comes to money. And, you know, we talked a little bit about,

03:25you know, this notion of fear of missing out or living for today and not for tomorrow.

03:30Present bias sort of encapsulates that, right? This notion of I have money in my pocket,

03:36it's money to burn, I'm going to spend it now on, forget about lattes and whatnot, I'm going to

03:40spend it on all life's pleasures today and think less about my 65 year old or 70 year old or 85

03:47year old self, because I don't, I don't have, I don't care about that person I care about today,

03:53and I care about the money in my pocket today. So if I had to go back in time,

03:57I wish I had a better understanding of present bias, I think.

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