Deduct, investing in housing or cryptocurrencies - are we ready for retirement?

In my research I often talk about how we are not prepared for old age, as it is a stage lacking previous socialisation. We are not prepared to live, understand and accept old age as a stage in our social and personal history. We are taught, for example, to be "functional adults", to prepare ourselves to be part of a labour market that does not always welcome us as we would wish. In fact, from our earliest childhood there is a strong pressure towards what our future should be like and towards all those "checks" that we have to be able to fulfil, such as having a job, a partner, children, a home of our own. 

The fact is that, when we are children or teenagers we often imagine what our adult life will be like (generally we don't get it right, things as they are) but once we become adults it is much more difficult for us to think about our own future as old men and women. Have you thought about what you will be like when you are old? What do you want to be like? What will you dedicate your days to? What will you achieve with the years of life that society as a whole has gained?

In other posts we have talked about retirement from the individual, experiential perspective, with the one that has more to do with your subjective experience and its defining role character (we talked about that here). However, retirement has a multiple dimension, as it is also social, it is an acquired right and, of course, it has an undoubted economic relevance. It is this dimension that we will reflect on today as a result of one of the research projects that CENIE has just presented, directed by Diego Valero and coordinated by Jaime García. They mix old age, behaviour, life cycle, decision-making and future, as well as a few biases; how could it not be interesting? Did you know that, as a general rule, we expect to live fewer years than we actually do?

Rivers of ink have been written on the issue of pensions and I do not want to delve into this topic, but rather go straight to the related dimension addressed by the authors: financial health. You will tell me that it is "the same thing", because these authors basically start from the question of how we prepare ourselves financially for our old age. In other words, will you have enough money to live on in your old age? I know how easily politicised this question is, but we are not going to answer it, but to investigate why it is interesting to ask it.

The project, promoted by CENIE, focuses on the issue of financial health and how to prepare for it. Financial health (which Valero says is the other essential, along with physical and mental health) means having enough money to cover your financial needs. Expressed in another way, the well-being that would be achieved through good management of one's own economy (personal, family) to be able to meet our basic needs, to cope with unforeseen events and, in general, to pay for a good life. We know that this "good life" is certainly subjective, but we will refer here to those common minimums that allow us to be able to sleep every night without having to worry about the fact of not having breakfast tomorrow or the uncertainty of whether we will be able to pay our bills (foreseen or unforeseen). 

The researchers of this project start from the detection of a generalised lack of financial education and culture in our society. I would like it not to be true, but we are not, in general, educated in certain concepts, and planning for the future is complicated for us. The study points out, based on behavioural studies, that people, when making financial decisions (which are decisions with a high degree of uncertainty), are driven by emotional impulses and cognitive biases. Some of these would be, for example, the present bias, which is the tendency to overvalue immediate rewards and undervalue long-term rewards. For me the easiest (and most recent) example is that of repeating dessert (my reward, wonderful, and immediate) versus sleeping better that night (too much dessert makes you sleep worse, trust me). 

The authors of the research talk about "YOLO", a horrible expression (in my opinion) and an acronym for "you only live once". This expression, which has come to be considered a kind of slogan of the younger generations, alludes to the exaltation of the prioritisation of immediate action and, often, of impulsiveness over prior and slow reflection in the pursuit of life experiences and, of course, in decision-making. It is, we might interpret, a somewhat perverted (or perverse) renewal of the Latin locution "carpe diem", which urged us to seize the day. However, while the aforementioned locution had a connection with the idea of "reaping the day" (and he who reaps, we know, reaps) and its background was more about making the most of time and not wasting it (don't leave for tomorrow what you can do today), the concept of "YOLO" would be more focused on the urgency of action. Something like "don't think about it, do it".

This project on financial health points, and for me this is a key issue, to the understanding of the life cycle as a continuum. That is, they continually allude (although they do not express it in this way) to the need to be aware that what your "I" does today will affect your "I" tomorrow. In the referred absence of socialisation, we tend to think that we are different and distant from who we are today, as if entering old age somehow deprives us of our identity and plunges us into an imposed homogeneity that does not belong to us. Under the idea that old age "changes us", we seem not to think about the older person we will be tomorrow. Let me explain: we are so used to "mistreat" the concept of old age, to despise and associate the concepts of old man and old woman with negative content, that we are reluctant to see ourselves as part of that group, to be one of them. This causes us to delay key decisions, to be ageist with ourselves (the rejection of our own old age) and to not prepare ourselves to enjoy a vital stage that will occupy more and more years of our lives, years that do not have to be lived in a negative way. 

Although for me the aforementioned ageism and the refusal to recognise ourselves as future elders who may have a series of needs different from those they have today come into play, the authors focus on this prioritisation of the gratification of the now, which is what prevents us from having (or, rather, fulfilling) a series of future objectives. They argue that financial health is a combination of habits and emotions, with financial capability being the thermometer of financial health. And habits, like behaviour, can be changed.

Ultimately, the authors argue for understanding the importance of financial health and analyse it from a behavioural science framework. To do this, the authors analyse the relevant retirement strategies of people of very different ages, mainly referring to housing, savings, financial investments and contributions to the public pension system. They do this by comparing the proportion in each age group and all the results are statistically significant: young people aged 17 to 26; those aged 27 to 36 (we will also call them young people, group II); a super group aged between 36 and 64 (perhaps I am less convinced by this aggregation) and a final group that includes all those aged 65 and over. The results can be consulted here, although I will note them briefly:

• For older people owning a primary residence is the best investment, but not for younger people (although we know that this is not a decision that is available to all young people either). Both the proportion of the 17-26 age group (45.23%) and the proportion of the 27-36 age group (45.45%) who consider this investment relevant are statistically significantly different from the proportion of the 65+ age group (66.35%). 

• The younger age groups (66.66% for the 17-26 age group, 50.64% for the 27-36 age group and 38.38% for the 36-64 age group) seem to value them more than the over-65 age group (17.75%). 
  With regard to public pension contributions, there is the opposite trend: 7.14% of respondents aged 17-26, 19.48% for those aged 27-36 and 39.78% for the 36-64 age group, while among the over-65 age group the proportion rises to 71.96%. In other words, the older the age group, the higher the proportion of people who consider it important to contribute to the public pension system. This is particularly interesting when we look at the results for the previous categories. It seems that younger people consider it more appropriate to invest. I am not going to make a single joke about cryptocurrencies.

• The last factor analysed by the authors where significant differences were found is that of savings. The results, from my perspective, would not have been as expected: as age increases, it seems that the importance given to saving decreases, from 78.57% in the 16-26 age group to 28.97% in the over-65 age group. 

Part of the explanations offered by this study, which may help us to understand not only the results but also our own behaviour, is that we prefer gratification in the now. Moreover, once we make a decision, we have a hard time letting go. Even though there may be a better deal or a better option, we usually tend to stick with our previous choices. This is due to our desire to be consistent with previous actions, even if it is not in our best financial interests. This also happens with other important choices, such as choice of partner; it is very common for us to get stuck in a relationship and not be able to change, to accept either that we made a mistake or that the relationship no longer brings us the comfort it once did. To take a more mundane example.

Later we will seek information (or mere excuses) to convince ourselves that our choice was the right one, just as we dig deep into our own beliefs and ignore what contradicts them. Can you think of times when you do something similar? How can you make sure that you are making the choices that will help you become the best version of yourself?