hYPERBOLIC DISCOUNTING
‘Preference for a smaller reward sooner than a larger reward later’
‘Live every day as though it was your last’ is a motivational mantra that squeezes as much as possible out of each day, but it’s potentially a disaster for financial planning. We are engineered to make the most of today, because our ancestors were much less certain that there would be a tomorrow.
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Clients may want to maximise their income in the short term, but they should always be made aware of the risks. For example:
- Nearly 40% of Australians have exhausted their pension pot by age 75 and pension savings in the US typically last just 17 years.
- A 65 year old man in the UK has a 50% probability of living to 90. A 65 year old woman has a 50% chance of living to 93.
- £10,000 income, 25 years ago would have to roughly double in value to maintain the same purchasing power today.
- Because clients can now take their pension fund as cash, doesn’t mean they should. It’s an option not a request!