Do you convert retirement saving to retirement income?

There is some interesting news out of South Africa, which relates to how people make monetary decisions when they have to convert retirement saving to retirement income. In Canada those who have money in their Registered Retirement Savings Plan, must convert these to a Registered Retirement Income Fund in the year the person turns 71. Many other countries have plans when at retirement, individuals must convert their accumulated savings into income.

According to Economics the optimal strategy for retirees is to try and secure a guaranteed income for life using life annuities.

A survey conducted by Just Retirement South Africa in 2016 revealed that 86% of people surveyed, between the ages of 55 and 85, preferred a guaranteed income for life in retirement. The 2015 Sanlam Benchmark survey showed a similar result, with 87% of people surveyed wanting certainty of income for life. But the reality is much different, the Association for Savings & Investment SA (ASISA) statistics reveal that 90% of 2015 annuity sales were of living annuities, which provide no explicit long term protection.

This observation has become known across the world as ‘the annuity puzzle’. Economists describe the annuity puzzle as a problem of maximizing lifetime expected utility.

It can be explained by recognizing that in the real world people do not make decisions by taking into account all costs and benefits. Instead, people are influenced by psychological factors and what’s considered socially acceptable or popular, and their preferences depend on how information and choices are presented to them.

The World Development Report (2015), ‘Mind, Society and Behaviour’, summarises hundreds of studies and behavioural finance research into one framework. The framework rests on three principles of human decision-making: thinking socially, thinking with mental models and thinking automatically.

These factors help to explain why when faced with this decision retirees currently convert their savings into income using living annuities:

·       Thinking socially. We have become accustomed to high real returns. Hence, investing (rather than annuitising) at retirement has become popular, with much marketing in the industry focussed on providing long-term returns, and not on how individuals can convert savings into income.

·       Thinking with mental models. When Investment framing is used at retirement instead of consumption framing research in the US and the Netherlands has shown that this has a significant impact on an individual’s ultimate decision. If investment framing is popular, instead of converting those savings into income, people will want to invest those savings. There is very limited evidence of individuals being presented with a comprehensive framework (and hence mental models) with which to understand the trade-off between living and life annuities, given their circumstances.

·       Thinking automatically. The benefits and risks of the available annuity options at retirement are complex areas to navigate. In the face of such complexity, people end up thinking automatically when faced with the decision of how to convert their savings into income – based on what they have heard from others (thinking socially) and using the rules of thumb available in the industry (mental models created over the years, founded on how to invest rather than how to convert capital into income).

One of the solutions put forward in South Africa, was for retirement funds to adopt default annuity strategies. Many retirement funds, especially umbrella funds, have started adopting default annuity strategies by making arrangements available for individuals to retire within the fund. It’s been shown that introducing defaults in other areas of finance can improve the ultimate decision making by individuals. It’s anticipated that default annuity strategies would be similarly successful.

In the financial planning industry, advisers can assist to improve their clients’ decisions on how to convert savings into an income at retirement. They can do so by introducing a ‘consumption framing’ approach, whereby appropriate mental models are created to enable an individual to trade-off between the main objectives at retirement (e.g. providing for lifetime spending needs and liquidity or an inheritance). 

Based on an individual’s circumstances, including their main retirement objectives, the most optimal investment strategy at retirement can be recommended. This includes the proportions between living annuities and life annuities and the asset allocation for the living annuity component.

All these interventions capitalize on behavioural finance techniques; it is believed that by making use of these techniques, individuals’ decisions about how to convert accumulated savings into an income can be improved, ultimately leading to pensioners securing more sustainable incomes into retirement.

None of us is average

I read this quote “You are the average of the five people you spend time with” and as I did more research I found that this quote was first said by Jim Rohn, who is a motivational speaker. I believe is idea is that you should spend your time with highly motivated and wonderful people, and if you do then you will become like the people you spend time with. This relates to the law of averages, which is the theory that the result of any given situation will be the average of all outcomes.

However, none of us is average, we are all special in our own way and we have our own unique gifts to offer the world. As we move through retirement we can reflect back over our life and make a decision to stay the course or to grow and become a better or different person.

Let us do an exercise now. Pick up your pen and paper, then write down the answers to the following questions:

1.   What is the kind of person you want to be?

2.   What is your ideal self that you wish to become?

3.   What are the qualities you want to possess?

4.   Who are the people you spend the most time with in your life currently?

a.   How are they like?

b.   What are the top 3 qualities each of them stand for?

5.   Do they match who you want to become in the future?

a.   Do their qualities match who you want to become?

b.   o they help enable or disable your vision for yourself

c.     Do they elevate you or bring you down?

6.   Who is the person who embodies the qualities you desire?

There are no rules. Let your imagination run wild here!

How can you increase contact with them?

This is where the interesting bit comes in. Depending on who these people are, you can use the following methods to reach out to them:

1.   Direct contact: This can be via face-to-face contact, telephone or via email/internet. Do you have any friends who might know this individual? Is there a way for you to bridge into the same social circles?

2.   Products of their work: If direct communication does not work out, you can always bring the person to you by reading any works under his/her name, such as shows, books or podcasts? Get your hands on them and soak yourself in them.

3.   Visualization: Clear your mind and visualize these people in your mind. Try to project them as clearly as possible, from how they look, think, act, say. When you are done, consult them in your mind and observe their responses to whatever you ask.

If you are to connect with them every day, even if for just 15 minutes a time, it’s a matter of time before your consciousness alters and shifts to the new level. If you are a stubborn individual in a low consciousness, it will take a longer period of time; if you are a high consciousness individual who is highly adaptable, it will take a shorter amount of time.

Eventually, you will start resonating with these people you aspire. You will find that you start thinking in the same wavelength and start talking about the same topics as them. Those thinking will then affect your actions, which will manifest into results you see in life.

Ensuring Canadians can afford needed medication

Prescription medication is a critical part of a high-quality, patient-centred and cost effective health care system. Canada stands out as being the only country with universal health care that does not have universal pharmaceutical coverage; as a result, all too many Canadians are doing without critical prescription medication due to cost.

Research (pdf file) done by the Angus Reid Institute found that over one in five Canadians (23%) reported that they or someone in their household did not take medication as prescribed because of the cost during the past 12 months.

A significant and increasing number of Canadians are feeling the pressure of prescription drug costs, are unable to afford the medications being prescribed to them, and are compensating by skipping doses, splitting pills, or not filling their prescriptions.

These are among the main findings of a comprehensive public opinion survey conducted in 2015 by the Angus Reid Institute – in partnership with the Mindset Social Innovation Foundation and with the co-operation of renowned health policy researchers in Canada. This national study also finds a large majority of Canadians share the view that "medicine should be part of Medicare", supporting a national Pharmacare system that would cover the cost of prescription drugs.

There is decidedly less consensus on what the program should look like and – especially – how it should be funded. This complete report including detailed tables and methodology can be found at here

Key Findings

•      More than one-in-five (23%) report that in the past 12 months they or someone in their household did not take their medicines as prescribed, if at all, because of the cost

•      Regionally, BC and Atlantic Canada show the highest levels of access problems (29% and 26% respectively)

•      Cost barriers affect Canadians of all ages

Many Canadians cannot afford their prescribed meds Nearly one-quarter (23%) of Canadians report that, in the past 12 months, they or someone in their household did not take their medicines as prescribed, if at all, because of cost. Statistics Canada's Survey of Household Spending reveals that spending on medication by households headed by a senior is the highest among all age groups. Despite provincial/territorial coverage, 12% of senior’s report skipping medication due to cost. Specifically:

•      About one-in-seven (14%) reported that they or someone in their household did not fill a prescription at all

•      One-in-ten (10%) did not renew a prescription

•      And one-in-seven (15%) did things to make a prescription last longer (such as skip doses/split pills/etc.) due to cost. Survey results highlight access barriers in all provinces, with variations that may reflect public coverage policy. For example:

•      B.C. has the highest rate of access barriers: 29 per cent don’t take medicines as prescribed, if at all, possibly because government in B.C. offers only “catastrophic” drug coverage

•      Atlantic Canada is also relatively high (26%).This too may be because of the limited nature of provincial drug plans in the region Cost barriers affect ages and income levels differently

•      All age groups experience some difficulty filling prescription drugs:

•      Almost three in ten (28%) adults under age 45 do so. This level was reported even by the youngest group, aged 18 to 24 (27%). This group generally also has lower income and less drug coverage.

•      Though older Canadians are less likely to experience access barriers to prescribed medicines, they still report experiencing such barriers at relatively high rates compared to other comparable healthcare systems around the world (2014 Commonwealth Fund International Health Survey pdf file). 

Have you found love yet?

When you begin to find love, in people and places where you haven't found it before, it's always because you've grown. It is also because you are open to new experiences, thoughts and dreams. Growing is good for the soul no matter what age!