The article “Three Behavioural Barriers To Solid Retirement Planning, And How You Can Overcome Them” was originally published on Financial Post on August 20, 2018.
Jason Heath: Retirement planning can be daunting, but with a little nudge in the right direction, everyone can be more motivated to develop a plan.
I read with great interest a recently released Ontario Securities Commission (OSC) report entitled Encouraging Retirement Planning through Behavioural Insights. It provides strategies for governments, employers, financial advisers and those planning for retirement to implement to make it easier to become financially independent.
Behavioural finance has risen to prominence recently, in part because of the work of “nudge” economist Richard Thaler, who won the Nobel Prize last year for his pioneering work in the field of behavioural economics. There can be psychological impediments to making financial decisions that are in our own best interest, but there are simple things we can do to encourage behaviour today that leads to better outcomes tomorrow.
The OSC and the behavioural insights team that prepared the report identified several barriers to retirement planning and provided potential remedies. I have narrowed down and elaborated upon my favourites.
Barrier 1: People will avoid making a retirement plan because of the perceived length and complexity of the process.
I have experienced this first-hand. We give our clients homework to do up-front before we begin to work with them. Sometimes it takes months and sometimes they do not complete it at all.
Service Canada could include a templated retirement planning tool with Canada Pension Plan (CPP) Statement of Contribution mailouts or Old Age Security (OAS) applications. This could include data from other government agencies like Statistics Canada or Canada Revenue Agency on retiree spending and income. While information about “average” retirees is imperfect given everyone is different, having general data on low, middle and high-income retirees could provide insight for near-retirees to apply to their personal situation.
Investment advisers or financial institutions could provide a retirement planning questionnaire pre-populated with existing information about the client, their family, their accounts, etc. This way, the retirement planning process would already be underway.
Employers have information about their employees, their salaries, their net payroll deposits, their pensions and their benefits. It is similarly feasible for human resources to pre-populate a retirement plan with this existing data.
Individuals engaging in retirement planning — on their own or with a professional — should aim to break the process down into manageable steps rather than trying to do it all at once. Start by developing a budget or spending summary; then identify retirement income sources; and finally estimate retirement funding using online resources or by engaging a retirement planner.
Barrier 2: People tend to go with the default option, and the default is not to plan for retirement.
One suggestion from the OSC report is for employers to make retirement planning part of their new hire on-boarding process. Financial institutions and advisers could do the same with new clients. By providing a standard template, they could expedite the data collection process and strike while the iron is hot with a new employee or client. Employers or financial advisers would then pre-book an appointment with a retirement planner to develop the plan.
This would be a great way for employees to know their employers are committed to their financial and overall well-being. For financial institutions and advisers, it is a clear way to ensure the relationship is about more than just a product sale.
A further intervention for employers would be to schedule an employee retirement planning meeting during the workday. This way, an employee would have to choose to opt out rather than needing to take the initiative to book an appointment on their own. Since many employees have spouses or partners, their exclusion from a workday appointment may not be ideal, but there are options like joining by phone or web conference if they could not participate in person.
Governments incentivize certain behaviours or subsidize certain costs using tax savings. Saving for retirement — RRSP contributions — are tax deductible. Child care expenses for working parents — daycare or a nanny — are tax deductible. Retirement planning fees are not tax deductible — unless paid by an employer for an employee. Perhaps this is something Finance Minister Morneau should consider for the next federal budget.
Barrier 3: The idea of retirement planning can bring on strong negative emotions and people may put it off to avoid those emotions.
The retirement planning process could be co-ordinated to coincide with times when someone is likely feeling more positive about their finances. For employers, this might be when an employee has just received a promotion or bonus. These events should also prompt individuals to put some thought to retirement.
For a financial institution or adviser, a good time might be when a client has just received a windfall like an inheritance or asset sale. I can share from experience that clients are turned off by phone calls from the bank branch to come in and talk about investments when there has been a large deposit to a bank account. It comes across as disingenuous and self-serving, whereas a phone call to develop a retirement plan to help make decisions about the windfall may be better received and more beneficial for the client.
Although the Canada Revenue Agency may not be best suited to give retirement advice, along the same vein would be a prompt about RRSPs, TFSAs or retirement statistics when issuing a tax refund above a certain threshold.
Other ideas in the Ontario Securities Commission report include sending prompts on a birthday, particularly a round number birthday; using regret lotteries, where people must participate and complete a retirement plan to be entered to win a prize; and using messages appealing to the ego, such as “you have been selected to receive this free retirement planning tool/resource/service.”
I applaud the OSC for commissioning the behavioural insights team report, and encourage governments, employers, advisers and individuals to consider some of the best practices to engage citizens, employees, clients or yourself to plan for retirement. It can be a daunting task, but with a little nudge in the right direction, everyone can be more motivated to develop a retirement plan.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.