Like self-improvement books, the purpose of pension adequacy surveys is to make us feel bad about ourselves.
Lousy and scared: we haven’t saved enough because we’re short-sighted and lack self-control. We don’t have a retirement plan and it’s getting late. That next avocado toast may deny ourselves a pair of reading glasses in the future.
And the complainer chases us to the grave. In the back of our minds, there is always the guilt that we should leave something, actually a lot, to our children. However, after including the legacy motif, avocado toast is truly toasty. So maybe we shouldn’t bother having kids?
Think about it: If our rationality weren’t limited, if we weren’t so conditioned to enjoy the present, if we could all do the math of probability and reward for every situation, and rule out future utility correctly, would any of us ever walk? go out without an umbrella … or fall in love?
But we do and we will. So why should our approach to money be any different, and why, for example, should it come as a surprise that 51% of Indians don’t have a retirement plan? People who do have plans do not do much better. In the US, a third of the 5 million defined contribution accounts that Vanguard maintains records for had a balance in 2019 of less than $ 10,000. The median account balance was less than $ 26,000. And this was before the Covid-19 recalls.
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Global life expectancy increased five years between 2010 and 2015, the fastest increase since the 1960s. A post-pandemic boost to investment in healthcare can make us all live longer, on average. Don’t be surprised if those who retire in 2035 need an additional five years or more of future income due to longevity alone. Where will that money come from in an underperforming environment? The most obvious answer is that retirement will continue to be postponed. In 1996, only 14% of Americans saw themselves working after age 65. Last year’s figure was 45%.
The other strategy can be a natural byproduct of despair. The savings promised by the retirement industry will rarely be enough after paying exorbitant fees from fund managers. As they approach the end of their working life, savers will buy riskier products. A survey by Fidelity International Ltd. shows that 48% of Hong Kong’s younger residents spend 25% or less of their savings on equities, while 22% of older workers have at least 75% of your participations in stocks or shares.
There is a third trick and most Asian cultures know it.
Kobe University economist Charles Yuji Horioka is a scholar of our desire to financially enrich our progeny. In January, he co-authored a new article that highlights the difference between Japanese who want to leave a legacy for altruistic reasons and those who use it strategically to exert intergenerational influence. The former will work harder and longer, while those who want to be cared for by their children in old age will work longer hours, but will retire early to maximize the care they receive. They will work harder, not harder.
Asians naturally do not want to die working, and many societies have some form of unfamiliar safety net. Japan has public long-term care insurance. In South Korea, Taiwan, Singapore, Hong Kong, and Malaysia, retirees expect the government to play a role in ensuring income security.
However, Asians know that it is not enough. Horioka’s own previous research has shown that the Japanese and Chinese have a strong legacy motive. The Indians have an even greater desire. Given the country’s youth demographics, limited state finances, and underdeveloped pension markets, even limited financial assistance for the elderly may have to be “bought” by them from the next generation. (The fact that children do not provide such help for free is now a well-established fact. Asian family values are no longer as strong as they used to be).
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Perhaps the Indians are already strategic with the reason for their legacy. They do not postpone the act of giving for their later years. They are doing it now. One of the world’s most popular educational tech unicorns is Byju’s, an Indian online tutoring company valued at $ 11 billion after its latest round of funding. Bangalore-based Byju’s recently paid $ 300 million to acquire Mumbai-based WhiteHat Jr, which teaches coding to children. For $ 3,999, WhiteHat promises children under 14 years of age exposure to “commercial-ready utility applications.”
So this is a form of advance legacy. If junior comes up with the idea of the next Facebook or Uber, parents can retire today. Otherwise, the child can always go to work in Silicon Valley and send money home, grateful for a timely investment of $ 3,999 that the parents really couldn’t afford. In any scenario, you won’t need to give much more on your deathbed.
The glaring inequality of wealth makes it risky to bequeath more than the family pet in the will. As economists Thomas Piketty and Emmanuel Saez have strongly argued, inheritance taxes should be 50% to 60%, and even higher for larger bequests. So the option is to spend the money on the improvement itself or give it to the offspring early.
Today’s workers can use the money. They can retrain to take on the robot lords and stay employed longer. But spending the same amount on the education of a couple of teenagers can offer superior benefits. It may even be the only long-term investment that outperforms a broad stock index fund.
That is the retirement plan that Indians and many middle-class people who maybe struggle everywhere find themselves in. They just forgot to tell the wealth manager, who is still shaking his head about the small savings from clients.
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