Why Planning Is Difficult?

If somebody said to you; ‘how much do you spend on groceries in any given week’ or ‘how long does it take to walk to your local bus, train or ferry stop’, the odds are you would be able to provide a reasonably accurate response?

More complex versions of the above question styles involve greater numbers of unknowns and uncertainties, and it is much more difficult for people to provide an accurate response.

In mathematics, this type of modeling is called extrapolation and is the act of reaching specific conclusions beyond those which can be attained using discrete sets of known data points.

Yet assumptions made under such conditions are often less meaningful and subject to greater uncertainty.

This doesn’t mean people shouldn’t make calculated guesses out of fear of being inaccurate – in fact it is something many of us do everyday as we process information and seek to make sense of the world around us.

Take the following two questions for instance, how much money will you need in retirement and how long do you believe you will live?

Well, according to 1 in 2 Australian pre-retirees (53.6%) this is likely to be a vexing question as they have no idea.

Meanwhile for the other slightly less than half of all pre-retirees, they have been busy ‘extrapolating’.

In fact 46.4% of pre-retirees claim to know how much money they will need as a lump sum in order to meet their lifestyle goals in retirement, and two out of three of this group (67.3%) are on track to achieve this.

This is positive, but the compound figures mean only 1 in 3 pre-retirees are both clear on how much they need in retirement and are in good shape to get there come retirement.

HNW pre-retirees are much more likely to know how much they need, at 71.6%, compared to only 37.6% of average pre-retirees.

The findings stem from a new CoreData-brandmanagement study of pre-retiree Australians.

Pre-retirees were defined as individuals aged over 50 who were yet to retire and were split into two distinct sub-groups Imminent pre-retirees and Distant pre-retirees.

Interestingly, despite the difficulty of extrapolation for something as complex as retirement adequacy, only 48.8% of pre-retirees say they have a financial plan (not necessarily with a planner) and only 27.9% of them actually have a plan that is written down.

While just under half of pre-retirees indicate they have a financial plan, this varies by sub-groups.

High Net Worth pre-retirees are much more likely to have a plan (75.7%), as are Imminent pre-retirees (62.6%), in fact twice as many HNW pre-retirees have a plan than the average net worth pre-retirees (37.6%).

HNW pre-retirees were also much more likely to have a written plan, with 45.9% claiming to have one in writing. This compares to only 19.2% of average pre-retirees.

This is a scary thought – only one in five pre-retirees has a financial plan that is written down!

Without wanting to paint a bleak picture – after all the share market has just gone through one of the strongest bull markets in living memory – but 42.1% of all pre-retirees don’t know how their superannuation has performed since the November stock market peak.

37.1% claimed their superannuation balances have declined.

Those who knew their super went down were twice as likely to be dissatisfied with their superannuation fund than those who either didn’t know or whose super went up (21.6% versus 9.3%).

Only 17.6% of HNW were not aware of how their superannuation performed.

Of those who both have had their super balances decline and also aware of that fact, almost one in five are moving to more conservative investments, 12.7% have moved their allocation away from shares and toward property or cash, and 7.5% are seeking professional advice on their investments.

This article appears in the April 21-27 edition of IFA Magazine