In a recent interview with TheStreet, Bob Powell unpacks a few minor changes consumers can make in the here and now to set them up for a comfortable retirement.
Transcript:
CONWAY GITTENS: What’s one thing people can do every day presently to help set themselves up for retirement?
BOB POWELL: Well, I think, you know, so a couple of things. One is, you know, make sure you’re saving, but also, you know, saving for what. And, you know, the things that I like to think about is, OK, it’s one thing to have a pile of money. It’s also another thing to calculate what your expenses will be in retirement. So, for instance, imagine that you have no paycheck anymore and what you need to do is say, well, how will these how much do I need to accumulate in order to fund 30 years of housing? It’s 30 years of transportation expenses, 30 years of insurance, 30 years of taxes. Where’s that money going to come from? Will it come from a 401(k) from a Roth IRA? Will it come from Social Security? Am I lucky enough to have a defined benefit plan? And so you need to really think about like, what do you have and how is that money going to be spent? And then the second thing I would mention is retirement. I always think about planning for retirement as it’s all about the rewards, right. I’m saving money to accumulate a big nest egg of money. I think about retirement differently. I think about retirement as all the risks that you’ll face in retirement. So the Society of Actuaries, for instance, notes that there are at least 15 risks that people will face in retirement. They include things like longevity risk, inflation risk, sequence of return risks, death of a spouse, change in housing needs, et cetera, et cetera, et cetera. So I think people not only need to think about what expenses they’ll face in retirement, but how will they manage and mitigate all these different risks that they’ll face and the tools that you’ll use to manage and mitigate some of these risks will be different. So I mentioned inflation risk. Well, you might want to make sure that you’re investing in stocks to keep pace with inflation. So that you won’t experience a decline in your standard of living. On the other hand, longevity, the fear of outliving your assets is a very real risk that you’ll face. Two equities. Investing in stocks doesn’t always manage and mitigate that risk, but things like annuities, income annuities queue tax deferred income annuities, those are tools that you could use to manage the risk of outliving your assets or the risk of longevity. So think about, just to summarize, you know, think about your expenses in retirement carefully, and then think about the risks that you’ll face in retirement. And what tools you use to manage and mitigate those risks.
CONWAY GITTENS: So give us the benefit of hindsight. What do you wish you knew about retirement when you first started your career?
BOB POWELL: Well, so one of the things, you know, it’s become very popular to talk about in the financial planning profession these days, is what are the behavioral biases that people have as they think about saving for investing for retirement? And one of the terms that is probably unknown to many people is something called present bias, which refers to the tendency of people to give stronger weight to payoffs that are closer in the present time when considering the trade offs between two future payments. So, for example, if I was to offer you $10 today or $15 tomorrow, if you were to choose the $10, you would have something called present bias, which is meaning you value that money more today than you do tomorrow. On the other hand, it’s quite possible if I was to say to you, Conway, I’m going to give you $10 a year from now, and then I’m going to give you $15 a year and a day from now, you might say, well, waiting the extra day is worth it. But people need to understand what their biases are, especially as it comes to money. And, you know, we talked a little bit about, you know, this notion of fear of missing out, or living for today and not for tomorrow. Present bias sort of encapsulates that, right. This notion of I have money in my pocket, it’s money to burn. I’m going to spend it now on forget about lattes and whatnot. I’m going to spend it on all life’s pleasures today and think less about my 65-year-old or 70-year-old or 85-year-old self, because I don’t have, I don’t care about that person. I care about today and I care about the money in my pocket today. So if I had to go back in time, I wish I had a better understanding of present bias.
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