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Feel free to reach out to PSG Wealth Manager  Patrick Duggan  directly.

You make better decisions if you “see” your senior self

A study conducted by Hal Hershfield, PhD found that many people feel disconnected from the individuals they’ll be in the future and, as a result, disregard rewards that would later benefit them. However, a brief exposure to old age through aged images could spark a change in behaviour.

Hershfield ran fMRI scans on subjects and found that the neural patterns seen when they described themselves 10 years in the future were markedly different from those seen when they described their current selves. In a later asset allocation task, people whose brain activity changed the most when they began discussing their future selves were the least likely to favour large long-term gains over small immediate ones. However, in follow-up experiments, when subjects were shown aged images of themselves, that tendency disappeared.

Meet Your Future Self

“When you make a decision now about yourself in the future, that distant self almost feels like a stranger,” said Hershfield.

In fact, when we think about ourselves in the future, we use the same part of our brain that we use when we think about a stranger. Hershfield and a group of researchers wanted to help young people vividly imagine their own old age, so they recruited college-age men and women, gave them goggles and sent them into a virtual reality laboratory where they encountered a kind of mirror.

“Just like a mirror you would see [at] the bathroom sink in the morning,” Hershfield said. “And in front of them they would see an image of their future selves.”

The image was digitally altered to make them look 68 or 70 years old, like special effects in a movie. Half the people in the study saw a version of their older selves while the rest saw a virtual version of their current selves. Hershfield said researchers prompted people to chat while gazing at their image, posing questions like, “Where are you from? Where did you grow up? What are your likes, dislikes, passions, hobbies?” Some participants were asked to talk about similarities they shared with the avatar.

Later, study participants were asked a series of questions about finances and retirement. Those who had seen their older selves answered that they were willing
to put twice as much money into long-term savings accounts as those who had seen their current selves.

“It’s fascinating. It really did have an effect,” said co-researcher Laura Carstensen, who directs the Stanford Center on Longevity. She said three variations of the study yielded similar results.

“When people can really connect to themselves and say, ‘That person at age 70, that’s me, actually,’ they tend to want to take care of that person more,” Carstensen said.

“When you invest, you are buying a day that you don’t have to work.” - Aya Laraya

In the Q4 2024 edition of The Wealth Perspective, Chief Investment Officer Adriaan Pask explored retirement planning for investors of different ages and looks at what can be done to maximise one’s benefits. We have copied it here:

The retirement savings landscape in South Africa remains concerning, with only 6% of individuals projected to retire comfortably, according to National Treasury. Furthermore, a study by 10X Investments reveals that nearly half (49.20%) of South African adults live below the poverty line, which significantly hampers their ability to save for retirement.

While 60% of the population now recognises the importance of establishing retirement goals – up from 40% in 2018 – many still lack confidence in their plans.

This precarious situation is exacerbated by rising life expectancies, which have increased significantly since the 1940s. Research from Just SA indicates that today’s retirees might expect to spend 30 to 40 years in retirement – almost as long as their working lives. This shift requires pension fund managers to account for retirement horizons extending up to 60 years, prompting a reconsideration of retirement age for many. The global retirement savings gap is projected to reach approximately US$400 trillion by 2050 according to data from the Organisation for Economic Co-operation and Development (OECD), underscoring the urgency for individuals to enhance savings efforts and adopt effective financial strategies earlier in their careers.

Solutions to address changing needs

To address these extended financial needs, innovative annuity solutions have emerged. Experts have explored the retirement income frontier, helping retirees optimise their financial resources. Unfortunately, many still opt for conservative living annuities that often do not provide adequate protection against longevity, leading to significant shortfalls. Hybrid annuities, which combine income stability with growth potential, present a promising alternative.

Integrated advice and tailored investment strategies can further enhance savings efforts. Younger investors should prioritise growth-oriented assets while gradually shifting towards more conservative investments that are tailored to their actual cash flow needs in retirement. This approach avoids overly cautious investments that could undermine long-term financial health. Maintaining a balanced equity exposure in retirement is crucial for meeting income needs over a potential 30- or 40-year horizon.

Age-specific strategies to maximise retirement savings

As life expectancy continues to rise, adapting retirement plans to reflect these longer lifespans becomes essential. Here are age-specific strategies to help you maximise your retirement savings and achieve financial stability:

20s: Start early with compound interest

Beginning your retirement savings in your 20s is vital. Even small, consistent savings can yield substantial returns thanks to compound interest. For example, saving R500 a month starting at age 25, with an average annual return of 7%, could grow to over R1 million by age 65, according to Just SA calculations. By contributing regularly and minimising debt, you lay a strong financial foundation. Think of it like planting a tree: the earlier you plant, the larger the shade later on!

30s: Boost contributions and use bonuses

As your career progresses in your 30s, focus on increasing your contributions, especially with bonuses. According to 10X Investments, investing a R10 000 bonus into your retirement account can significantly boost your savings. Aim to save at least 15% of your income annually – for example, saving R60 000 from a R400 000 salary can make a substantial difference. Prioritise equities for higher growth, while balancing your portfolio to ensure stability, much like maintaining a healthy diet.

40s: Evaluate goals and adjust investments

By your 40s, it’s essential to review your retirement goals. If you’re falling short, consider increasing your contributions. A diversified investment portfolio that includes both equities and bonds can provide growth while safeguarding against volatility.

50s: Make catch-up contributions and shift to security

As retirement approaches, take advantage of catch- up contributions. If you’re 55 and can add an extra R5 000 to your retirement plan, this can help offset any prior shortfalls. Only shift a portion of your assets to safer investments if your cash flow needs require it. Prematurely moving to conservative investments can cost you in your later years.

60s and beyond: Plan withdrawals and sustain growth

In your 60s, establishing a sustainable withdrawal strategy is key. Delaying benefit withdrawals can enhance your monthly income later; waiting until age 70 could increase your benefit by about 30%. Even in retirement, maintain a reasonable exposure to growth assets to protect against inflation, ensuring your savings last through several decades. Managing your annual withdrawal rate – typically around 3% to 4% – will help ensure your funds endure.

Understanding the retirement savings crisis and adopting a cashflow-focused investment strategy can help you secure a stable financial future. Proactive planning for longevity and inflation will build a strong foundation for your later years. Start today to see your future blossom!

Reminder

Leverage tax incentives before the tax year-end.

“You must pay taxes. But there’s no law that says you gotta leave a tip” - Morgan Stanley advertisement.

Two of the best ways to save and invest (and preserve purchasing power) tax efficiently are via a pre-retirement vehicle such as a Retirement Annuity (RA) or a voluntary investment vehicle such as a Tax-Free Investment Plan (TFIP).

Contact your (young) Wealth Manager as soon as possible to discuss your unique investment needs.

For a bit of fun, we ‘age faced’ ourselves – see below.