Increasing longevity and poor financial decisions are two “weather systems” that will come together in a “perfect storm” for those who are not prepared for the implications.
But a good financial planner can help you overcome poor decision-making, Andrew Bradley, the chief executive of Old Mutual Wealth, told this week’s Financial Planning Institute (FPI) conference.
The FPI promotes professional financial planning by well-qualified financial advisers who adhere to a code of ethics.
Bradley, one of the authors of How Much is Enough, says he and his co-authors explored the links between money and happiness and are aware that amassing wealth doesn’t mean happiness will follow.
Your financial planner should understand the relationship between money, time and happiness and should be able to help you make sound decisions to optimise these in relation to each other.
The reality is that many South Africans are in a dire situation. They make poor financial decisions and they do not take account of increased longevity in their retirement planning.
Bradley says that in 1800, the average life expectancy was 38. In 1900, it was 53. In 2000, the average person lived to between 77 and 80, and in 2100, at age 65, the average person will be only half way through his or her life.
The oldest person to have lived so far died at 122, and the first person to live to 150 is said to be 50 already. Meanwhile, the number of birthday cards Queen Elizabeth sent to centenarians in the United Kingdom last year was 7 500 – a 20-percent increase on 2013. Longevity has massive financial implications, Bradley says.
However, the reality is most South Africans are making poor financial decisions. Our savings rate is going backwards rapidly because, as a nation, we spend more than we earn.
Even among higher earners there are high levels of debt. Old Mutual’s research shows that 70 percent of people earning more than R800 000 a year are living beyond their means and incurring significant debt. In addition, South Africa’s are significantly under-insured – by some R4 trillion in life assurance and R6 trillion in disability insurance.
When it comes to investing, research shows that, because of poor decisions, South Africans earn average returns of 4.1 percent a year, whereas the average fund earns 9.4 percent, Bradley says.
Most people are aware that they need to eat well and exercise, but they don’t do it. Similarly, Bradley says, most people need help to keep them from making poor financial decisions.
Bradley says a financial planner, like a good caddie in golf, is aware of the challenges and obstacles on the course and the best strategy to play it,
Investment guru Warren Buffett has suggested the key to investing is not how much you know or how clever you are, but that you have “a framework for making decisions and the ability to keep emotions from corroding that framework”.
This, Bradley says, is also the value of using a good adviser: he or she can help you develop and stick to a framework or financial plan.
He says the main reasons most people are inadequately prepared for the perfect storm that comes with increased longevity are behavioural and psychological. This is because of the way we think, which is firstly with our “feeling brain” rather than our “thinking brain”, he says. Our brain’s limbic system makes intuitive decisions before our neo-cortex rationalises these, and even then they can be lazy and flawed.
Bradley says that the Harvard Business Review conducted research into our behavioural biases and came up with a framework of how to make good decisions. They found that, to make the best decisions, you need to do the following (and in relation to financial decisions, Bradley says a good adviser can assist you with all of these):
* Make estimates of what might happen under three scenarios (low, medium and high). Consider where you are now, where you want to be, and what could happen under the three scenarios. What are the implications and consequences? We generally underplay the bad situations, Bradley says.
* Make sure you think twice about your decision, with a sleep in between.
* Do a “pre-mortem”, by pre-empting failure that results from unexpected circumstances. What will happen in a high-inflation environment, for example, or if your costs, such as the expense of a family wedding, are greater than you expect?
* Take an outside opinion. A good, trusted and caring adviser should give you a non-conflicted, educational and empowering view.
An adviser can also ensure that your plan is not derailed by your emotions, Bradley says. Often, your emotions are led by a desire to keep up with the Joneses, and this can lead you into debt if you spend beyond your means.
You avoid this by looking inward. Decide what is important to you, what makes you happy, what helps you feel secure in your finances and what you enjoy the most. Then set out your spending priorities accordingly and constantly review them against these priorities.
When you can do this, what the Joneses are doing is less of an issue, and you will be able to ignore “the noise” that comes from advertising, the media and social media, which all encourage us to compare ourselves with others, when we should be comparing our accomplishments to our own objectives.
Bradley says you should rather measure yourself against where you have come from and how you want to be better in five years’ time.
Lastly, he says, associate with people who share your money values.