Retirement Planning with a Commitment to Our Future Self
I occasionally enjoy a good Looney Tunes cartoon with my boys, and recently saw one where Sylvester the pussycat was trying to gain some willpower over his desire to eat Tweety Bird. Joining B.A. (Birds Anonymous) was a public commitment to stop being a "bad ol' puddy tat", and an important part of his recovery. However, his will power was weak (after all he is a pussy cat) and he was bombarded with TV and radio commercials about succulently prepared mouth-watering birds. He then took his commitment a step further and chained himself to the radiator to help make his will power indomitable. This is much like what Odysseus did when he tied himself to the mast so that he could listen to the enchanting song of the Sirens without sailing into the rocky coast of their island.
What do Sylvester the pussycat and Odysseus have to do with retirement planning? They demonstrate the importance of using a "commitment device" to stick to their well-conceived plans. This article has been inspired by the writings of behavioral economists, including Richard Thaler (via the book Nudge) and Daniel Goldstein.
A commitment device is one of the ways we can get our "current selves" to keep a commitment that we make to ourselves when we are focused upon what we really want for the good of the long-term (to our "future selves"). This technique helps prevent us from doing something we will regret when we are in the heat of the moment.
Living within our means is a classic (yet unequal) battle between the current self and our future self—in other words, between immediate gratification and delayed gratification. The current self doesn't want to restrain spending; he wants the immediate gratification that comes with the enjoyment of travel and buying new "stuff". Yet the future self wants the current self to rein in the spending and instead save so that he can retire in comfort.
Unfortunately, it is the current self that is really in charge, isn’t it? It is our current self that is fully present while our future self can barely be imagined. Our current self is being asked for things (e.g., from our kids), or is bombarded with advertisements enticing us to spend. An excellent example playing on our current self’s desires is the new Verizon commercial that shamelessly states “There is nothing like that feeling of getting something new…(especially) that thrill of getting a new phone”. The wireless customer then opens the box over and over as the light and sound of heaven pours out. Our present selves are junkies for the euphoric high of consumption, only to leave our future selves in a serious pickle. Worse, some of us will even kill-off our future selves in order to rationalize the joy of spending now. Have you ever said, “I could be dead in a year anyway; therefore, I might as well enjoy myself”. Worse, is if this self-deception goes on year-after-year (i.e. repeat until broke).
So a commitment device is used because resisting temptation is hard, and because we know (deep down) that we must protect our future selves. What are some examples of commitment devices that are used in the world of retirement planning to give more power to our future selves?
- A public commitment such as announcing on Facebook that your plan is to retire in Monaco within 10 years.
- The SMART (Save More Tomorrow) Program which allows 401(k) savers to commit today to save a chunk of their future raise in their 401(k)’s.
- Having an advisor to hold you accountable to your long-term plan. In fact, it has been found that the best way to enforce self-control and reduce procrastination is to have an “external rule enforcer”, such as an advisor, friend, or spouse who can give rewards/punishments.
- Executing an Investment Policy Statement (which says you will hold to a prudent and appropriately designed portfolio for your long-term plans through thick or thin).
- The use of Target-Date Funds which force changes in asset allocation over time.
To one degree or another these are all excellent tools, but even with great tools we still postpone retirement planning. Some would say it has more to do with denial, self-deception, procrastination, or impudent goals. However, behavioral economists would say it is more a lack of belief about our future. We are not able to imagine being retired (or older). We even find it hard to believe. We can’t or don’t want to imagine ourselves sitting in doctors’ offices, relying on eldercare services, or sitting in a nursing home bed.
But perhaps we should. Perhaps this will make our future selves more real. Perhaps this will give our future selves a louder or more powerful voice. How can you make the reality of your future self more concrete?
One way used by retirement planners (including myself) is to attempt to illustrate potential futures of clients under different savings targets and therefore spending patterns. It is certainly possible to see what type of standard of living you would end up with if you maintained your current course versus deferring some consumption and saving more. So, perhaps seeing (and imagining) that our retirement age must be pushed back by five years, or our lifestyles cut by $30,000/year (in retirement) will help open our eyes to the stark reality of our future.
There are also free phone apps such as Oldify that will show you what you will look like when you get older. Talk to your aged self by looking at the picture. If you can better visualize yourself old, perhaps you will gain some leverage towards making a change. These tools help us to really reflect upon what life will be like in the future when we are older and don’t have the resources for family, healthcare, lifestyle, etc. Ask yourself what will happen if you don’t save enough for retirement? What will life be like in the future if you keep spending your income and have little savings? What will this cost you in your relationships, your self-esteem, etc.? Visualize this clearly and experience what it will feel like to be poor and old. By really reflecting on these things and their associated feelings, you will gain some leverage for moving towards positive change.
If you know you are not saving enough; if you know you don’t have an emergency cushion; if you have revolving credit card debt – then your present self has been in charge.
Give your future self a gift - know you must make a change (no matter how small) right now for the benefit of your future self. See your future (if you don’t change), experience how it feels, then take a step towards financial security by making a change that your future self would want.
I wish all the best to your current and future selves!