MMPI toyed with the idea of calling this piece Pension Planning, but our experience teaches us that the word Pension is distasteful to many. As it happens, gambling fits in very nicely because that’s exactly what our life choices look like.
We wager that we will live and live healthily to work and earn an income. We wager that our employer or series of employers will reward us well for our efforts. We wager that our chosen life partner is the “right one”. We wager that we will live long enough to enjoy a healthy retirement. That is some level of gambling!
The taxman and the financial industry are to blame for the dreaded ‘p’ word. It is intended to signify the difference between the previous Friday when you were working and the following Monday when you are not. For some, this date is pre-determined well in advance (say, age 65) – but for many more including the self-employed the exact date remains an imponderable gamble.
In order to dilute some of the gaming risks, most people wisely secure life cover in case of untimely death and serious illness insurance to protect against debilitating circumstances where they cannot work and earn a proper living. In a nutshell, the gamble that we take during our normal working lives is that we will survive in good shape long enough to sustain our employment.
Sometimes, life can be so busy and hectic that we don’t recognise these gambles until it’s too late. Nevertheless, they should be seen as real wagers with our finances. MMPI accepts that it is not easy to cover all eventualities and that worrying continuously about the choices can be self-defeating. But recognising them as gambles is a great discipline.
Perhaps the biggest gamble of all is the bet we take later in life around retirement. It’s essentially a bet on how long we are going to live! For those lucky enough to be members of defined-benefit schemes, their assured salary in retirement will be a fixed percentage of their final working salary. For most others in defined-contribution schemes, no such assurances apply. Instead, they wager on two distinct choices, which morbidly centre on when they are likely to die!
The gambling continues to represent important decision-making despite its gloomy undertones. The two distinct choices are to accept a salary for the rest of your life or to establish a retirement fund. The first choice (so-called annuity) is an irreversible decision that proves quite satisfactory to many retirees. The second option (retirement fund) offers greater freedom and personal choice but few assurances.
If retirees are looking to examine the maths (which most are not) they will hardly be comforted to know that the most arithmetically correct decision cannot be known in advance but only after death – ouch!
Living to 110 will likely mean that your retirement fund is fully depleted. Your annuity will still pay a regular salary, but its value will not keep pace with inflation. Decisions! Decisions!