Your archetypal pushy parent may be familiar with psychologist Walter Mischel’s ‘Marshmallow Test’.
Seen by some as an early indicator of intelligence, it gives young children the choice between one marshmallow (or similar treat) now or two larger treats later.
Auto-enrolment effectively takes the view that most of us will fail Mischel’s test – the lure of living for today is just too great. While auto-enrolment is to be welcomed, if we want to encourage younger people to take pensions seriously, we need to find other angles, too.
Seven Investment Management (7IM) has conducted some research which suggests that while, in the early years of pension saving, less now might not mean more later, there is another way of looking at the pensions picture that could be far more compelling.
To highlight the point, let’s first return briefly to those marshmallows.
For the kids who couldn’t resist the immediate gratification of one marshmallow now, so what? If you’d scored two, it’s still not going to keep you going for long – the maths aren’t exactly compelling and the jury is out on the cleverer choice (for me, at least).
The financial services industry excels in using a blanket approach, telling us all that we need to save more for retirement, and this is a huge barrier for younger people who have many competing financial priorities – not just flat whites and avocado on toast.
We have failed to make the maths stack up. Part of 7IM's research demonstrates that effective pension saving is not always about saving harder, it can come increasingly down to saving smarter. Saving smarter, crucially, depends on your life stage.
Financial planners working with clients to create a retirement plan will often undertake a cash flow modelling exercise.
7IM's work sets out to try and investigate the general trends we can identify from our own cash flow modelling exercise. To do this, we created many sets of potential client inputs, based on the following:
- We looked at saving rates from 2 to 20 per cent of an annual salary (in 1 per cent increments).
- We looked at withdrawal rates from 5 to 100 per cent (in 5 per cent increments).
- We looked at different retirement ages from 55 to 75 (in five-year increments).
- We looked at different risk profiles for the investments, from 4 to 7 per cent targeted return (in 1 per cent increments).
This gave us a wide variety (over 10,000) of individual plan assumptions.
7IM then ran these assumptions through its simulation model, giving us an output for both the chance of running out of money early and the expected time this would happen.
Part of the research was into how you might minimise the chance of running out of money in retirement. While the obvious answer is to grow your pension pot to be the largest possible size by the point of retirement, this is easier said than done.
What’s more, the ways of going about it aren’t necessarily as straightforward as just saving more money.