Video | Saving habits: what can we learn from the US?

Louise Doherty: Welcome back to the Thinking Forward podcast. Here we discuss trends and developments affecting the UK pension industry. To better understand how people in the UK can achieve better outcomes and we supercharge this through global learnings. 

I'm Louise Doherty and I'm Head of Marketing for Strategic Initiatives at Standard Life. I've been working on our Thinking Forward thought leadership programme since we've launched. And today I'm delighted to be hosting the Pod along with Mike Ambery.

Michael Ambery: Thanks, Louise. It's good to be here with your expertise and also our guest today. David John, who is a self-proclaimed political refugee, we’ll explain what that means in in finer detail. But David John is a senior strategic policy advisor at AARP, a public policy institute in the US. Really pleased to have you here as part of our stacked episode. So thank you again, David.

David John: Thanks again for having me.

Louise Doherty: In this episode, we’re going to think a little bit more this time about savings and pensions behaviours. So I'd really like to understand more about emergency savings. You've done a lot of work on this in this state. So what are the key findings and practice. What's worked, what's not? It would be really good to hear.

David John: You know, we find that, emergency savings is a really growing area as, an employer-based benefit. We find that, people want it. When we did, polling, we were actually a little bit concerned because we thought, well, a lot of people already have a savings account. They're going to say no, 70% said yes, we want this.

Louise Doherty: Doesn’t surprise me at all.

David John: And but especially works for this is payroll deduction at AARP, for instance we have a benefit that uses a payroll card. So it's sort of like having it on a debit card if you will. And it's payroll deduction. It's about I think 3% of wages and the like. And we don't check to see what people use it for. Frankly, the administrative burden would be way too high for that. But people like it and they use it. 

And there are two things that we find that are rather crucial here. One is that if people have and use emergency savings that’s likely to stabilise their household finances for up to four years in the future. So it's not a one-time thing. We also know that, using payroll deduction helps tremendously, but how you use that payroll deduction is rather crucial. When we go out and say, all right, you need to sign up for a bank account. And we have actually some legal issues in the US. There's something called Know Your Customer, which is supposed to keep people from, funding terrorism or things along that line, but it requires people to provide a certain number of pieces of information to open an account.

Louise Doherty: Your passport, your driver's licence.

David John: Yeah, exactly. And we find that that's actually a real burden. Interestingly enough, the best research has actually been done here by Nest Insight. And they did an automatic enrolment mechanism, and they found with automatic enrolment, into a separate emergency savings account that you actually increase participation by 50 percentage points. They also found that that increased the amount of emergency savings people saved. 

So we are actually in the process of trying to have that in the US we have a limited amount of emergency savings, auto-enrolment if it's connected to a pension plan. But as I mentioned in the previous episode, half of our workforce doesn't have a pension plan, so we need to have the other option too.

Louise Doherty: I think it actually helps kind of cultivate that kind of culture of savings, doesn't it? Yes. Which I hear a lot from my mom and my dad, and I do have emergency savings now. I'm in my 40s, so thankfully I do. But if you'd asked me 10 years ago, I didn't have three months of savings sitting there in an emergency fund. So I think it is it’s really, really important to be thinking about how we help people do that.

David John: It is. But you touch on something that's really interesting. Typically, an advisor would say you need three, roughly three months of emergency savings. But what they're doing is conflating two separate risks. One risk is what happens when the car engine needs sudden repairs. We just had to deal with that with my daughter. 

The other risk is what happens when you lose your job. If you lose your job, you need the three months. If otherwise, we’ve actually found in an academic, study that we commission that if you had as little as about one month's earnings, that actually is enough to stabilise from the other type, the the accidental type of that…

Louise Doherty: So perhaps it's a barrier saying three months because it took me quite a long time to save that... I believe it. because it took me quite a long time to save that... So actually we think about saying a month is far more palatable for people.

David John: And we discovered actually that when we said three months, there were an awful lot of people who just threw up their hands and said, well, I can never do that. So I'm not even going to try. Yeah.

Louise Doherty: It actually takes us on to the next topic we wanted to look at. And its individual decision making. So we struggle in the UK to strike a balance. You know, go back to DB/DC don't you. You're putting the decision making in the member or the customer's hands. How does that work in the States?

David John: Well, we have, as we discussed last time, the auto-features and the auto-features are making that much easier. Essentially in the system we have, if you don't have a DB, a regular pension, and that's about one-in-ten in the private sector have some sort of a pension plan at this point, essentially all of the risk is on you. You have to agree to be auto enrolled and the like. You have to make the decisions. 
A key decision actually is in the US, unlike the UK, you may remove your retirement savings and use it for something else. In far too many instances, people look at this and say, well, you know, I've got enough money, I can remodel the family room or something along that line. And that's something that’s one of the reasons we're doing the emergency savings is to give them people an alternate level. But we have far too many people who are having all of the risk really on them, don't know how to handle it. And that's, a growing problem.

Louise Doherty: Yeah, I can imagine.

Michael Ambery: Louise, I’m most interested in, your savings habits in particular, what you did in your 30s and what you did in your 40s, as in, 
you thought you'd save more in your 40s.

Louise Doherty: I actually think David made the point in the earlier pod that around 40, 42 is when people start to really think about retirement savings and our research, in our retirement voice research. It's 36 and so actually, I think that's quite true somewhere in the middle, maybe for me personally. But you do start to think more about saving and your future focus. Whereas I was more here and now having fantastic holidays three times a year in my 30s.

Michael Ambery: So I absolutely understand that. And I understand the pivot, which we'll do in the conversation. Now back to David, if that's okay, because we'll talk about tequila all morning and, choice cocktails. 

But David, just pivoting from saving to actually spending and you've done a huge amount of, publication and you've spoken a lot about saving habits and spending habits and in particular those spending habits post-retirement age. So post 65, post state pension age of, needing more, probably in the first 10 years and then needing less in the later years, based upon dynamic need of individual members, I wondered if you, you know, wouldn’t mind expanding on needs for that retirement income and, any solutions that we should be considering?

David John: You know, there’s a really interesting new data that's come out. And this is out of something called the Rand Corporation, which despite the name is a think tank. And they actually started looking at spending rather than what we usually look at as a retirement income. In other words, what do people do, how do they spend, etc, they found two things. 

One is for many people in the first year of retirement, they spend as much or maybe even more than they did before because they're rewarding themselves for a successful career. However, as time goes on, there is a decline. And this is true across all income groups and all racial and ethnic groups, gender groups, etc, of somewhere in between 1.5% and 2% a year, year after year. 

And part of this is changed circumstances, part of it is health issues. But they found that another thing was that people just don't enjoy it as much. I've been to Las Vegas 15 times and, I just don't feel the need to go again. And in particular, this is seen in things like car trips and eating out and things along that line. So essentially an individual who retired at, say, age 65 is going to actually be spending about half as much as they did when they reach 85, assuming they do, of course. But what they also showed is that at that point, gifts, contributions to charitable groups or things along that line start to grow. So they're actually using some of their money for that. And then of course, in the US we have a privatised health system along with much of the else, and you have final, costs, what happens in the last year of your life. And that's a serious problem. 

But we found out something else also, which was that a substantial number of people, will look at what they've got in retirement savings and they'll say, oh, my God, something terrible is going to happen. It may happen tomorrow. It may happen 20 years from now. And if I use a substantial amount of this money, I’m not going to have it for, that. 

So people actually do tend to underspend. And among those who continue and that, frankly, is a large majority who continue to, invest some of their retirement savings, they may actually die with more than what they retired with.

Louise Doherty: We see it through, our staff and their holidays. So it's a behavioural thing that no one wants to use all of their holidays. They're thought, oh, I might need it, I might need it. And then at the end of the year, they’re left with far too many holidays. So it's definitely a behavioural kind of psyche thing.

David John: Yeah. There's a lot that goes on with this. I mean, one of the things we discussed in the last episode, a little bit about whether people had spending, I think, but there's also a really interesting psychological change. 

One friend of mine who retired said, well, you know, for the first two or three weeks or so, it was like an extended vacation. I caught up on my to do list and I slept in late, and now I am just terribly bored and we asked people who were retired and then went back to work, why did they go back to work? And of course, the answer we were expecting to have been, well, I don't have sufficient income. I need to go back and do something to that. But that was only about half the people. The other half of the people said, I went back because my social network is connected with work. Yeah, I don't want to just sit around the house and do nothing. I'm bored. I need to have some purpose in life. 

So we tend to look at it in the retirement industry as a financial decision. Yeah, but it's just as much a psychological decision. I mean, when it comes down to it, retirement is a foreign country and you really don't understand it until you get there.

Louise Doherty: Yeah, I think that's a great way of describing it.

Michael Ambery: I think it's a brilliant way and I noticed in the previous pod, we did discuss the number of solutions that are available in terms of finances. We didn't actually talk through, and that sort of mental behavioural well-being type issues that I don't think we really cover up to now. the other area of coverage that I'll move on to is probably housing. 

In the States, I’m well aware from, vacations. There's a, there's a difficulty there in, homeownership, real problems in certain states, Hawaii, New York, California, as good examples of those we have the same problem in the UK. How do you afford to save and have adequacy in housing? How do you have adequacy in pensions? So notwithstanding all of that, how do we actually solve any of that and make the right decisions at the right point?

David John: Oh, that's really hard. 

Mike Ambery: I'm glad I asked it rather than answering it, David.

David John: I mean, in the US we do not have a separate pension pot or a savings pot for housing. It's something that a person typically does. US, the down payment is typically about 3%. And then you have a 30 year mortgage that can either be fixed or variable. You obviously get a lower rate if it's variable. You also may have much higher payments going forward. there has been talk and there are instances where people put money out of their retirement savings and they use it for housing. 

It can if you do it at the wrong time and in the wrong way, have a really substantial impact on what you're going to get there. But then you produce the question, now, am I going to live my life today, or am I going to live my life for when I reach 67 or something along that line? So there is no perfect solution at this point in time. We do have certain tax subsidies for housing. You can deduct the interest, for instance, from your income tax and things along that line. 

But by and large people parallel save and it may well be that they save less for retirement while they're building up their down payment, but they tend to do that mostly at the same time.

Michael Ambery: Louise, you’ll remind me of a stat I think the Pensions Policy Institute said, 80%.

Louise Doherty: That's right. Of individuals, 80% of individuals have, or the majority of their pension pot and sort of two decades post-retirement,

Michael Ambery: Which seems quite a troubling issue if we move on from two decades to something that you've also written, David, which is the 100 year life. 

David John: Yes. I'm working on that.

Michael Ambery: Okay. Can we all work on it? And go a little bit further in terms of that, how do you think that sort of spending cycle will change and that sort of mental behaviour will change?

David John: You know, that's again that’s one that we are just becoming aware of the changes in longevity and how that's actually going to affect people. Yeah. With our social security system, the government pension, area, we’ve started to fold that in and that's actually having an effect on the system finances. 

It's not a good effect, but that's one thing we are starting to recognise. Also that one aspect of the 100 year life for many people is that you're not going to be as, it’s not going to be as easy to make complex decisions when you're 85 as it was when you're 65. So one of the things that we have seen is the deferred income annuity. And the deferred income annuity is something that you would buy at, say, age 65 or something along that line. And it starts to kick in at roughly 80 to 85. Now that gives you two things. If you have a 100 year life, one is you know how long you need to manage your savings to last. 

And the other thing is you don't have the worry that you're going to lose. You're going to run out of money at a very advanced age. So that's again starting to be folded into, the different combinations of, retirement income.

Michael Ambery: So, again, that’s sort of talked through the products that are available on the sort of spending cycle you mentioned before about employers, obviously cognitive ability, which you referred to there. isn't one of the areas of sort of health improvements as much as, statins and other drugs that have improved, life expectancy, I guess. 

Do you see a need for employers to consider what they do, and how they treat people, in terms of how they retire in the UK, there’s no forced retirement age. you retire when you retire, but the ability to actually perform jobs? And we also see technology coming in, in forms of support for that job. Do you think employers need to be a little bit more cognisant themselves over duration of jobs and ensuring people gradually retire and have that workplace solution?

David John: In the US in most jobs, you also don't have a forced retirement age, you do for things like police and fire and certain pilots and things along that line. But for the most part, yes, the employer is starting to look at this and to look at it rather seriously. We participate with some other entities, in a financial health survey every year. 

And one of the things that's been growing in employer interest is mental health issues. And this, you know, on the one hand, yes, this is the mental health issues that may develop at a younger age, but also at an older age and the like in trying to put together a combination. 

And I mentioned in the last podcast that there was a lot of private sector innovation going on. Well, we are starting to see is a mixture where you have either the regular annuity that is put in or if you have, something like a phased withdrawal plan, that you would have, a deferred annuity put into that. These are not horribly popular yet, but we are starting to recognise that this is something that’s going to be essential going forward.

Michael Ambery: So it's got to be a solution really, where individuals and employers are utilising different sort of products to fit their lifestyles, which ultimately become personalisation for individuals going forward, which is something that and Lou and I have spoken about for a long period of time. How do you personalise that? How do you create that philosophy for different products and deploying those at different periods, which I think is what we've said over both sort of pods up to now.

As a final sort of question to close this episode, obviously Lou usually calls me, very similar in DNA to a primate, but, I’ll ask it in a different way if that's okay, US and UK savers, do you think we're very similar? How close do you think we actually are? 

David John: Oh, I think we're much more similar than we'd expect. I think that we are seeing in the surveys and studies the, the behaviour is very similar among the savers. The priorities among employers are very similar. Likewise in providers, I mean, there's certain language changes. We call it a plan. You call it a scheme. in the US, a scheme is a criminal enterprise, but I think that we are actually much closer. Much of the differences that I actually see have to do with the regulatory and legal environment and how that is handled and how people have to deal with things.

Michael Ambery: Thank you. David, I'd really like to thank you. It brings us to the end of the episode and a special thank you to you for a stacked pair of episodes that I hope everyone has found a fascinating discussion in terms of retirement and behaviours in the US, and the similarities between US and UK. Clearly, I think there's a lot of takeaways, that we can make and hopefully our audience will take those and maybe even approach you for a few questions or us for that. 

But for the audience, please do let us know if there are any other topics you'd like to, consider. Get in touch if you'd like to be part of that pod as well. If you've enjoyed the discussion today as much as I have, you can find more interviews and podcasts on our website. You just need to search Standard Life Thinking Forward, and we'll bring you the next episode of the pod very soon. Thank you.