Abstract
We analyse focus group discussions about long-run (retirement) financial decisions, and explore the extent to which participant responses are related to the oft-used behavioural explanations of financial choice. We find that persons of all ages understand the importance of long-term savings, but face many challenges in preparing for retirement. There is mixed support for a range of associated behavioural explanations. Complexity, relevance of decisions, and uncertainty come up repeatedly in all focus groups, irrespective of the age of the participants. The use of heuristics, confidence, costs of mistakes, mental accounting, and the importance of social interaction appeared of less immediate relevance to all groups. We discuss the implications of these findings for how the financial services and superannuation industries communicate with members. There appears to be a general view from the focus groups that breaking large, complex retirement decisions into more manageable pieces (based on personal circumstances) and providing more focused and relevant information to investors would result in more effort and care expended on retirement decisions.
1. Introduction
This paper analyses focus group discussions about long-run (retirement) financial decisions. Our goal is to document thoughts and comments from wide-ranging discussions with participants in a national mandatory retirement savings scheme (Australian superannuation). In addition, we explore the extent to which participant responses are related to the oft-used behavioural explanations of financial choice. We find that persons of all ages understand the importance of long-term savings, but face challenges in preparing for their retirement. While some of these challenges are framed in rational terms, many involve cognitive and emotional factors. Hence, our research process and focus divert from traditional finance research in two ways. Firstly, we join the small, but growing number of researchers ‘…dabbling in inductive qualitative research’ (Gippel, 2012: 140). Secondly, we interpret the focus group discussions in the context of the behavioural finance literature, noting the presence of possible decision biases in participant responses.
This project draws on a number of research streams. First, we use retirement as our long-term decision and analyse participant comments across a range of age groups (mid-twenties to mid-thirties, mid-thirties to mid-forties, and persons in their fifties). Recent moves from defined benefit retirement funding to defined contribution and self-saving has shifted responsibility and risk to beneficiaries. Little is known how the general populace will manage the complex decisions involved in retirement funding. Forming groups by age allows us to gauge how perceptions or attitudes might change as retirement nears, even though it may still be a relatively distant event for our youngest participants. Second, we use focus groups, a smaller-scale and highly intensive qualitative research technique. Our insights are based on a small sample of 48 persons, but we have about 96 person-hours of highly interactive participation. For our focus groups we designed a semi-structured research instrument to serve as a guide for a professional facilitator. In these sessions we explored a range of topics about retirement and how people thought about saving for retirement. We were not interested in the particular choices participants make; rather we were interested in how they think about these choices, what they view as obstacles to making prudent choices, the language and concepts used to frame these choices, and resources employed in decision making. Third, we compare participant comments with the academic literature on long-term financial planning, with a particular emphasis on behavioural finance. 1
This research uses methods of qualitative inquiry. We have no standardized data, nor are we testing hypotheses. Rather, we document key themes and provide insights for follow-on quantitative studies. As researchers, we are directly engaged in both the design of the research instrument and the categorization and interpretation of the results. In the context of qualitative research, this can be referred to as ‘researcher as instrument’ (Kaczynski et al., 2014). While this approach may face criticism on the grounds of subjectivity, there are clear advantages in using a qualitative design for this project. First, focus groups give us the opportunity to hear the views and concerns of our participants in a relatively unstructured and open environment. By taking a ‘bottom-up’ approach, we may learn about participants’ concerns more directly, in the language and context that is most comfortable or relevant to them, thereby allowing inductive discovery. Second, we triangulate on researcher viewpoint in the formulation of our findings. Rather than relying on a single interpretation, a research team reviewing focus group transcripts reduces the potential for subjectivity in interpretation.
2. Background
We chose retirement savings as our long-term financial decision as it affects all persons, involves choices that will significantly influence living standards, and can have consequences as much as 40 or 50 years into the future. Retirement savings decisions are intricate; one must take into account a range of external factors such as uncertain investment returns and general economic growth, changing regulatory environments (e.g. workplace rules, access to social welfare benefits, and taxation), family responsibilities (to parents, children, siblings, bequests, etc), expenditure needs and preferences (both current and future), and uncertain future morbidity and life expectancy.
Like most industrialized countries Australia has shifted more of the burden of retirement planning and funding to individuals. 2 Australian government retirement funding includes a modest means-tested government pension as well as superannuation, a largely mandatory savings system that provides a tax-advantaged vehicle for long-term wealth accumulation for individuals. Superannuation serves a wide cross-section of investors – currently including, but not limited to, all full-time, part-time and casual employees (or contracted labourers) earning at least $450 (pre-tax) a month who are between 18 and 69 years of age (Australian Tax Office (ATO), 2013). Minimum periodic contributions are collected through employers as a salary deduction (originally set at 3%, currently 9% of gross salary, and increasing to 12% by July 2019). Superannuation accounts are individually owned and, under the current structure, managing these accounts involves considerable discretion in selecting a superannuation provider, allocating investment flows to various asset classes, and assessing tax consequences of payments and redemptions. Because responsibility for choices rests with the individual, these complexities are thrust upon the general population, who have a broad range of investment and financial experience and expertise. As a compulsory system, superannuation provides a common instrument that serves as a focal point for discussions about long-term savings and lifetime financial planning for the Australian adult population and makes it an ideal context for discussing retirement saving.
Superannuation first became available in Australia in the mid-19th century, and applied only to a minority of employees. The current mandatory system was introduced on 1 July 1992, when under the Superannuation Guarantee Act (1992), all employers were required to make tax-deductible superannuation contributions on behalf of their eligible employees to a nominated superannuation fund. 3
The original Superannuation Guarantee legislation did not specify to which fund employers should allocate superannuation contributions. 4 This was remedied by the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act No. 102 (2004) which came into effect on 1 July 2005. Under this legislation, employees were able to nominate any complying superannuation fund into which their employer must pay the required superannuation contributions (see Australian Prudential Regulatory Association (APRA), 2007). Recent Australian Prudential Regulation Authority (APRA) statistics report AUD 1.40 trillion of assets invested in superannuation accounts as of June 2012 (APRA, 2013), with contributions in the year to June 2012 of AUD 117.5 billion.
The government role in the superannuation industry is primarily as a regulator (the exception being as a payer for government employees). While Australian government agencies such as the Australian Securities and Investment Commission (ASIC), APRA, and the Australian Taxation Office (ATO) regulate and enforce legal standards to protect individuals, there is no guarantee for superannuation capital or earnings (see Worthington, 2005). With the decline in defined benefit funds (recent APRA statistics show that defined benefit funds constitute only 6.9% of the total superannuation assets in Australia for entities with more than four members as of June 2012; see APRA, 2013), individuals are now shouldering greater responsibility for their financial future. 5
At the same time, there has been a rapid growth in the development of financial products among superannuation fund providers. Individuals ideally need to consider each product’s investment strategy, holdings, risk and return to match their own subjective preferences (Worthington, 2005). Added to this are the complexities of fees, charges and insurance options (see for example Brown et al., 2002), all in the context of aggressive marketing of superannuation products and services (as in Beal and Delpachitra, 2003).
While individuals may thrive in the presence of superannuation investment choice, there is limited evidence that this is the case. For example, if individuals are provided with investment options that include a default (or initial) selection, they are more likely to maintain the default option (for an example in the case of superannuation see Fear and Pace, 2008). Also, the chance the default option is selected may rise with the number of alternatives (Iyengar and Lepper, 2000; Johnson et al., 1993; Kahneman et al., 1991; Sethi-Iyengar et al., 2004; Tversky and Kahneman, 1986). Studies of Australian superannuation accounts seem to confirm this effect; only a small number (i.e. fewer than 10%) of participants actively choose their investment allocation (Senate Select Committee on Superannuation and Financial Services (SSCSFS), 2000, para. 8.7). This raises the question of whether increased choice motivates individuals to become more involved in retirement savings decisions. A part of this debate has focused on product disclosures and participants’ understanding of what is being disclosed (e.g. financial literacy) (see Gallery, 2002). Research suggests poor understanding of superannuation at the community level (Beal and Delpachitra, 2004; Worthington, 2005). 6 There is growing evidence of poor money management habits when it comes to investment and retirement decisions, as reported by the Financial Literacy Foundation (FLF) (2007), and poor levels of financial literacy for some socio-economic groups. 7
The current superannuation system seems to suffer from an inherent contradiction. The system appears to assume that individuals are not prudently saving for their retirement and so mandates savings for the entire working populace. Yet the individual is required to choose how and where the savings are invested, regardless of their ability to navigate the complexity of the system. This tension in Australian superannuation creates a significant research opportunity. As a mandatory system superannuation avoids many selection bias problems. Because the system is complex and offers considerable choice it creates a fertile environment for exploring drivers of long-term financial decision making.
3. Method
In line with the emerging trend of qualitative research in finance (Bruhn, 2015; Gippel, 2015; Ho, 2015; Neck, 2015a, 2015b) in order to understand better financial decision making we adopt a qualitative approach. The orientation of the approach follows critical change theory (Kaczynski et al., 2014).
Focus groups, which allow for inductive inquiry, are an appropriate qualitative method for this research project. Focus groups may effectively elicit information from communities that are less financially literate (Litosselliti, 2003) and may provide the flexibility needed to examine a broad range of topics with a variety of subjects. They can allow direct engagement with individuals to produce a “rich body of data expressed in the participants’ own words and context” (see Stewart et al., 2007: 39). Following Anfara et al. (2002), we describe the qualitative research process that we have followed. This helps the reader to understand how conclusions have been reached.
We conducted a series of focus group sessions where subjects both answered advance questions prior to the discussion session (we refer to this as their at-home task) and then discussed a range of related topics about retirement as a member of an 8-person focus group. The goal of the focus groups was to engender a deeper dialogue that investigates some of the possible behavioural reasons for individual action. The at-home task was intended to improve the dialogue by getting subjects thinking about the topic before the discussion session.
All focus groups were audio recorded with the permission of the participants and verbatim transcripts were prepared. Focus group transcripts were analysed using the Scissor-and-Sort Technique to identify key themes, and highlight discussion relevant to these themes. 8 To limit subjectivity, the transcripts were analysed by the facilitator and a number of the project researchers (Section 4 presents key themes).
We present a set of behavioural drivers as distilled from current academic and industry research (see Section 5), and we review the transcripts to identify the extent to which these drivers are present or absent in participant responses. 9 While we did not ask explicitly about the role of these behavioural drivers, we allow for the possibility that these key influences might be expressed by participants in the focus group sessions. This was an intentional methodological strategy; if we had framed the focus group questions in terms of suspected behavioural drivers, this would have potentially biased the responses.
3.1. Focus group composition and details
Various discussions on focus groups (e.g. Litosselliti, 2003; Stewart et al., 2007) highlight the importance of participant homogeneity in each focus group (i.e. grouping individuals with similar characteristics). Hence, our focus groups are stratified by age to consider individuals at different life stages to help capture differences in their views of retirement. We conducted six focus group sessions. Sessions with each of three age groups were held in July 2008 in Melbourne and Sydney, Australia’s two largest cities. Eight persons attended each session. The details are as follows:
Two focus groups consisting of younger individuals who are working and financially active and who are currently saving for retirement through employer based payments (26–34 years of age);
Two focus groups consisting of individuals who are expected to be beginning to think more seriously about retirement (35–45 years of age); and
Two focus groups consisting of individuals for whom retirement is approaching (50–60 years of age).
Participants were recruited to ensure homogeneity on characteristics other than age. 10 This process included checks to see whether prospective participants were interested in retiring at some point; were Australian citizens working full-time, and therefore likely to have a long-term commitment to, or involvement with, the Australian retirement system; had sufficient household income; owned a home or had thought about buying a home so that retirement could be related to another major financial decision; were involved in superannuation decisions in their household; and felt they would be active contributors to discussions. Participants were re-screened when they arrived for the focus group discussion to ensure consistency. Each session ran at specialized focus group discussion rooms for 2 hours with 1.5 hours set aside for the discussion and half an hour for settling in, building rapport and allowing time for late arrivals.
The selected focus group participants were an even mix of males and females, had comparable levels of home ownership as the broader Australian population, but had higher income than that of the general population as gauged by Australian Census data (Australian Bureau of Statistics (ABS), 2006).
A professional facilitator was responsible for the recruiting, re-screening, facilitation of the discussions, booking of discussion room venues, audio recording, producing copies of the verbatim transcripts of the discussion and ensuring that each participant was offered and paid an incentive for their time. 11 The facilitator also analysed transcripts and provided independent feedback and analysis of the focus group discussions.
3.2. Focus group discussion guide
Before arriving at the focus group sessions, each participant was given a simple at-home task to complete to prepare them on the discussion topic. This task was designed to cover basic and introductory questions related to retirement and financial planning.
A semi-structured discussion guide was used by the facilitator in each focus group to ensure that specific issues were raised in every group. Four major themes were covered in the focus group discussions. Approximately 15-20 minutes were spent on each theme listed below:
Financial Matters and Attitudes to Retirement and Superannuation;
Retirement Planning;
Information Sources and Information Gaps; and
Financial Advice.
Table 1 lists these themes in the form of broad research questions, along with a sample of the issues raised within each of these themes during the focus group sessions. Due to the large number of questions asked, only a sample of focus group questions is included in Table 1. The facilitator asked to what extent participants had thought about these issues, why they do or do not think about them, who they felt was responsible and what assistance could be provided to them. Given the time constraint, not all discussion elements could be reviewed in every session. 12
Research questions in relation to focus group discussion guide.
The broad themes that were used to lead the focus group discussions are also used as categories when presenting the initial analysis of the transcripts in Section 4.
4. Discussions 13
In the discussion that follows we include quotes from participants. Some are representative of the thoughts of the group, and some are included to reinforce or elaborate on our analysis.
4.1. Participants
Participants aged 26–34 appear to be financially aware. However, their lives are changing and they are faced with greater responsibility and financial burdens. They do not appear to expect a retirement safety net, such as a government pension, when they grow older. Selected responses include:
“When you start earning reasonable money for the first time in your life you want to enjoy it.” “Trying to get ahead and put money away to get ahead. And also try to get rid of the debt we incurred as students. Try to put away as much money as you can.” [In response to query about current financial focus]. “You get on [on-line banking] everyday and move things around. I like that access and being in control.” “Be prepared, don’t live like a pensioner.” “I don’t think anyone of our generation would seriously consider there would be a pension. The pension won’t be around. There won’t be money in the budget.” “It won’t be there.” [In response to the query “Where does the pension fit?”]
Participants aged 35–45 years appear to have a more immediate focus when it comes to financial matters. In addition to the challenges faced by the younger group, rising costs of living and family obligations heighten their financial concerns. Retirement planning is important, but difficult; they lack key resources and knowledge. Few have the time or the inclination to commit additional resources to retirement planning:
“Saving to renovate a house and then saving for kid’s school fees.” [In response to query about current financial focus]. “You know you should be planning for retirement now but you just don’t have the extra funds, or headspace to think about it.” “You hope that what you have in place [compulsory superannuation] will carry you through.”
The 50–60-year-old participants appear to be in transition and most are re-thinking their retirement plans. Many are not prepared financially for retirement. Those who are less prepared financially feel it is likely that they will struggle through retirement and cannot afford to stop working. The economic climate at the time of the focus groups (near the height of the global financial crisis (GFC)) accentuates these concerns, and retirement expectations among this group are in flux:
“A year ago we could say let’s retire in a year… now we are thinking, no way.” “I see people currently on the pension and I just don’t think it’s feasible. I need as much money as I can in my super. My idea of retirement is part-time work.”
4.2. Dialogue 1: financial matters and attitudes toward retirement
Retirement seems to be viewed as a period of changing emphasis, rather than a time to leave the workforce. Across most age groups participants were planning on being active in retirement, with many targeting part-time work or self-employment. Part of this may be because they assume that retirement requires significant financial resources. Calculators and retirement planning tools seem to recommend savings targets that are unachievable, and thereby push the possibility of full retirement further away. Selected quotes on resources required for a traditional retirement were:
“It is in the millions, plural.” “I have no idea. Lots… More than I can get my head around.” “I don’t think about [retirement]. The amount is too big, so I just push it out of my mind. You have to concentrate on life right now.”
On the subject of superannuation, many participants view it purely as a mechanism to help participants save for retirement. Some think of it as passive, inflexible, and not sufficient to fund retirement. Participants expressed displeasure about the current superannuation system. Some found superannuation difficult to see or to understand. They did not feel connected to, or aware of, their superannuation savings and appear to be less confident in the system providing for them in retirement. Some responses were:
“I don’t understand it and it’s not my field.” “It’s not understandable and I have misunderstood so many things.”
4.3. Dialogue 2: retirement planning
It appears that participants aged 26–34 years believe that careful planning over time will prepare them for retirement. However, making the sound decisions and setting up an effective plan is difficult. There appears to be a preference for retirement plans that are more hands-on and immediately engaging:
“You can’t rely on super[annuation]… the decisions I make now, and in the future will set me up in retirement.” “I want to use the money now to build for retirement. You can live in a house… you don’t see [your] super[annuation] ‘til you retire… whenever that is.” “I am going to buy investment properties and live off the interest in retirement.”
For the 35–45-year-old group it seems that retirement planning, while important, is displaced by other financial concerns:
“I’ve changed my goals because when [my child] came along it was time to knuckle down. My husband has taken time off, I’m working full-time for the family.” “My son is starting high school next year and that’s going to be a huge jump. When things go the other way like interest rates and what have you, you start asking the question that will I be working ‘til I’m 90 years old? I think the government is doing less and leaving it more up to the individual. We were somewhat protected years ago.”
Those aged over 50 seem to feel that superannuation does not meet their current needs; but it is superannuation that will augment the (modest) government pension that will provide most of their retirement income (see Clare, 2008). 14 Many feel that they do not have enough remaining working years to accumulate sufficient savings to improve their retirement outcomes. Thus, it is no surprise that when asked about their financial preparedness, participants had this to say about their future:
“Totally inadequate!” “Hold my breath and hope for the best!” “What I have for retirement… it’s disgusting!”
The lack of preparedness among those in the focus groups aged 50–60 years is consistent with other findings. For example, by comparing widely adopted Australian budget standards for retirement with average superannuation payouts (coupled with the government pension), the Association of Superannuation Funds of Australia shows that available funds in retirement are inadequate (Clare, 2008). More recent research by Rice Warner Actuaries for the Financial Services Council shows that a substantial retirement savings gap exists, and will persist under current policy parameters even after allowing for an increase in the Superannuation Guarantee from 9% to 12% (RWA, 2012).
4.4. Dialogue 3: information sources and gaps
Comments from this dialogue did not appear to have much variation based on age group. Contrary to what was reported in the FLF (2007) survey, most participants do not know where to begin looking when it comes to information pertaining to long-term financial planning. 15 While many claim that they would start with a simple ‘Google’ search, most are unsure of what they are searching for. Other common information sources are magazines, friends and relatives through social interaction, newspapers, and personal accountants. While many participants use information from the regular statements provided by their superannuation fund, few would contact their superannuation fund provider for information, and many found communication from their superannuation fund impersonal and not tailored to their needs. Account statements were viewed as too complex with key information difficult to find. Participant comments included:
“A bit like food packaging and no single way to balance and compare and contrast.” “I think they [regular superannuation statements] are terrible they are not written clearly for the ordinary person. They’ve got little pie graphs on them, but I don’t understand it. I think they are shocking. I think the explanation is very poor and too complicated.” It’s [regular superannuation statement] too generic. It’s got to be though because it’s a generic system.” “But by the same token I’ve never thought they offered information personally for me. And I never took up the other offers because I was afraid they were trying to sell me something else.” “What am I searching for; I do not even know what to ask for.”
Participants’ viewed simple, tailored, reliable and unbiased information difficult to find. Many felt that information about their superannuation is not as complete or as accessible as information provided by other institutions (such as private health insurers, general insurers, and mortgage providers). Few participants identified with information provided by their superannuation fund. Instead, they felt that it was aimed at those who are older and more established financially.
“I never would have thought to go to my super fund. I would have thought about going to a financial planner.” “I feel a bit stupid going in when they are probably used to dealing with 60 year olds with $1,000,000.” “…that’s a completely different focus so it’s aimed at that market and it’s not terribly relevant to us. If you look at the ads where they’ve got the Harley or the block of land overlooking the sea, it’s all that age group.”
4.5. Dialogue 4: financial planning and advice
Some participants had sought financial planning expertise and advice, and most acknowledge a need to be better informed; a view shared by all age segments. Many require endorsement by a friend, family member, colleague, publication or authority before choosing a specific financial planner. Most significantly, very few know where to start looking for a financial planner, and this is often a key barrier to their retirement planning and preparation. Some of the views can be summed up as follows:
“I would [go to a financial planner] if I knew or had a good referral. I wouldn’t go to yellow pages and find someone.”
Although financial planners are seen as the only real source of customized retirement planning information, few would trust their advice. This distrust can be attributed to perceptions of dishonest motives among financial planners and the apparent poor advice received by many. 16 Due to a lack of knowledge, most participants feel that they might be exploited by financial planners and would feel more comfortable if they had an opportunity to compare and contrast advice from multiple planners. There is a desire for long-term, collaboration with a financial planner:
“You just want them to look at what you are doing, and point you in the right direction.” “You want them to set you a plan, and review it at different milestones in your life.”
5. Participant views and the literature
While many individuals generally felt they were more informed about financial matters than previous generations, most are still unprepared for retirement. Throughout the focus group discussions participants were asked to elaborate on the reasons underlying why they fail to prepare for retirement.
5.1. Behavioural drivers
Based on a review of current academic and industry research we have distilled a set behavioural drivers that are described briefly below. 17
Complexity – Individuals might avoid retirement decisions as a consequence of the complexity inherent in these decisions (e.g. Merton, 2008). The proliferation of planning tools, insurance products, investment choices, etc. may be contributing to general inattention by retirement fund participants by creating additional complexity.
Confidence (Overconfidence) – Individuals might be overconfident in their knowledge of, and ability to manage, retirement savings. This overconfidence may stem partially from an illusion of knowledge; for example, individuals might confuse easy access to information with a deep understanding of the investment process, causing them to be overconfident (see Nofsinger, 2008).
Cost of Mistakes – Smith and Walker (1993) and Camerer and Hogarth (1999) find that individuals tend to “behave more ‘rationally’ on cognitive tasks, such as working out time value of money or remembering vocabulary words, when the stakes are greater” (Poterba, 2008). This may be particularly relevant for individuals close to retirement as the cost of mistakes may appear to rise as their superannuation balance grows.
Heuristics – Representativeness and Familiarity – Kahneman and Tversky (1974), and Kahneman et al. (1982) demonstrate that individuals use rules or shortcuts to help reduce the complexity of processing and analysing information. These shortcuts allow individuals to quickly organize and process large amounts of information (see Nofsinger, 2008). However, shortcuts or heuristics can result in incomplete analysis and persistent error.
Measuring the Effectiveness of Decisions – It may take a long time to determine the effectiveness of past retirement savings decisions. In addition, there can be a wide range of confounding factors that make it difficult to determine the efficacy of past actions (e.g. changes in local and macroeconomic conditions or employment prospects). An inability to measure the effectiveness of decisions may be a disincentive to prepare for retirement (see Bodie et al., 2008b).
Mental Accounting – Mental accounting is a “set of cognitive operations used by individuals to organize, evaluate and keep track of financial activities” (Thaler, 1999: 183). Individuals categorize different decisions (such as housing, food, mortgage, etc.) and consider each category or ‘mental account’ in isolation. If this is the case then individuals would treat money differently depending on where it comes from, where it is kept, and how it is spent. Hence, superannuation accounts may serve to compartmentalize further a person’s analysis of retirement savings, potentially exacerbating problems of inattention.
Myopia – It is possible that individuals are short-sighted and do not take fully into account longer-term consequences (Munnell, 2008). Laibson et al. (1998) discovered that most individuals are ‘hyperbolic’ discounters, causing them to perceive higher near-term discount rates.
Regret Avoidance – Individuals may avoid making decisions about retirement because they are worried they may make a mistake and feel regret. This regret avoidance (sometimes referred to as ‘loss aversion’ or ‘fear of regret’) could prevent individuals from doing what is in their best interests. (e.g. see Merton, 2008).
Relevance of Decisions – Younger individuals may not see the need to save and prepare for retirement. Early in their working life superannuation balances are low and individuals have limited disposable income. There may be the perception of limited opportunity, and hence lower interest in retirement savings, even though the future value of any savings may become significant. Munnell (2008) noted that inertia and procrastination are major impediments to individuals saving earlier for their retirement.
Social Interaction and Herding – Social interaction may help individuals to keep up with current events and may influence their decisions (e.g. Duflo and Saez, 2002). For example, Shiller and Pound (1989) conducted a survey of 156 investors and found that investors became interested in a stock because they heard about it from another person, and were likely to tell others about their investment.
Uncertainty – Retirement savings decisions involve much more than understanding superannuation and investments. Individuals review a range of influences, such as marital status, relocation, raising children, health considerations, and employment opportunities. These uncertainties may make it difficult to predict future income and consumption needs (see Lucas, 2008).
We review the transcripts from the focus groups looking for comments that relate to the behavioural drivers listed above. Focus group participant comments are collected and coded, with some qualitative analysis of each included in the following sub-sections. Comments are included only when there was general agreement among the project researchers of their association with behavioural drivers.
5.1.1. Complexity and uncertainty
Participants expressed concern over the complexity of the superannuation system. They felt that superannuation is difficult to navigate or understand and are uncomfortable when confronted with issues such as access to funds, performance measures, investment strategies, fees and charges, etc. Many consider simple, unbiased information difficult to obtain, and choice overload from fund, product, and investment options adds to the complexity. Hence, it is no surprise that participants expressed feelings of stress when dealing with retirement savings and superannuation.
“My daughter is starting into super fund and the [superannuation fund] gave her info and the documents must be 80 pages and my daughter said ‘Dad work it out for me.’ There must be a way to condense it and make it easier to understand.”
In addition to complexity, individuals faced uncertainty, brought home by the deterioration in asset values due to the GFC. Many participants expressed anxiety over the economic downturn, and their current losses have caused them to put off planning temporarily.
“Bit like shifting sands. Industry volatile and industry taken a big dive and we are looking at long term. It is very difficult to know. Some way it is one of those things you put in the too hard basket.”
One participant aged 26–34 exclaimed that “[she] does not look at the future, [she] just has to think about today and there are already difficulties.” In addition, many participants aged under 45 years expressed concern over how other commitments have forced them to neglect retirement saving. Mortgages, children’s education, credit card bills, private health insurance, retrenchment and sickness are just some of the commitments that distract from retirement planning. For others the uncertainty and complexity appear to have led to inaction. The following comments relate participants’ feelings of uncertainty and the level of retirement savings:
“I’m not saving for the future right now so that’s the problem. I have that distinct feeling in my head that I am now looking at the mountain in front of me. I’m making it worse and time is ticking away!” “You really don’t know where to start. If someone could say [put] $20 in that account and tell you exactly what to do, tailor made, you’d do it. Otherwise you will say I’ll just pay the credit card bill now and think about it later.” “You don’t know. Who knows by the time I retire how long I’m expected to live…”
Participants aged 50–60 have a clearer view of retirement as most of their children have grown and they have a shorter time horizon. Unfortunately, some have not saved enough, with a consequence being the need to adjust expectations and defer retirement.
5.1.2. Confidence
Although recent empirical papers suggest individuals are overconfident in financial matters, our discussions suggest otherwise. 18 Participants are generally not confident when making decisions about superannuation and retirement. This lack of confidence seems related to the complexity and uncertainty surrounding retirement decisions. Many feel removed from their superannuation fund as they are not in a position to influence returns and feel unable to make informed choices.
“It’s hope, not wanting to think about the alternative. You want the best possible outcome in your life. Because it’s in the future you can’t disprove it [not investing more in retirement savings].”
Despite a general lack of confidence, there were a handful of participants aged 26–45 who were contemplating self-managed superannuation funds. Their rationale was that they want to be more involved in their retirement savings, and that with additional investment choices they felt they could generate superior returns. While this behaviour may be a result of overconfidence, it may also be a result of individuals receiving utility from greater self-sufficiency or autonomy.
“I am interested in the self-managed super fund and there’s heaps of information out there and have read a whole lot of literature and then hop on the website to see what’s available.”
5.1.3. Cost of mistakes
Participants aged less than 45 years largely view it as their responsibility to fund their retirement, resulting in feelings of pressure and panic among many. Among those aged 26–34 many are more calculated in their retirement planning; some describe a process with multiple elements, rather than a single approach or objective. This method of breaking the task into smaller, more manageable pieces may reduce the perceived cost of mistakes, spreading it across a number of decisions. Many describe a combination of superannuation and other investments (investment properties, shares, etc.) to fund their retirement. However, establishing an effective plan is difficult and some appear especially cautious:
“I don’t want to mess around with [superannuation] because it’s already there. If I had some other money to play around with, then that’s a different thing. But, I wouldn’t want to mess too much around with it.” “I’m a safety kind of girl. I don’t do risky. I’ve watched friends crash and burn this year by changing their super around.” “I’d have to educate myself a lot more and sit down with people and work out how much money would be needed and work backwards in a way to say how much money I need to bring in and have that secure so that if shares do plummet I have something else as well.”
5.1.4. Measuring effectiveness and relevance
With retirement far in the future individuals may become complacent and ignore key investment decisions. Most participants struggle to balance numerous financial obligations. Further, some participants do not understand how even small, regular contributions can have a large impact on their final retirement wealth. When older participants were asked to comment on why they did not start saving earlier, they noted that it was difficult to estimate the impact of additional savings. Some typical comments were:
“It’s about today, not tomorrow! We’re so busy thinking about today we can’t think about tomorrow, let alone what’s going to happen when we retire. My head is going in 40 different directions at any given time. We don’t understand [superannuation]. It’s not in your face and it’s not discussed among your peers.” “[Planning for retirement is] so far away and we don’t budget for 30 years time. There’s no spare cash at the moment so no point thinking about it. No benefit today from storing [money] away.” “Retirement is too far away… [My superannuation balance is] such a small amount at the moment that you could spend two weeks researching about it and you might make [only] an extra $30 at the end of the year.”
5.1.5. Mental accounting
Mental accounting was apparent in the way participants described or related to superannuation. Almost every participant viewed superannuation as an employer-paid benefit that was out of their control. Comments were consistent with a ‘mental account’ for superannuation, compartmentalizing their retirement savings away from other assets and liabilities. This compartmentalization appears to thwart an active focus on retirement saving, leading to complacency for most participants. Overall, participants had the following to say about their superannuation investments:
“I don’t see it, I don’t notice it.” “Your employer is putting it in there; it’s not your money.” “I don’t count it.” “It’s dead money.”
Participants who were more aware of the need to plan for retirement appeared to treat their superannuation ‘mental account’ differently; ignoring their superannuation savings, thereby increasing their incentive to work harder.
5.1.6. Myopia
Participants aged 26–34 tend to be myopic when planning for retirement. Many are dealing with major financial hurdles such as mortgage and credit card repayments, causing them to defer superannuation decisions. Financial distractions continue and grow for those aged 35–45 as an expanding family may result in falling household income with rising expenditures. Some prefer to enjoy disposable income, rather than attend to the future:
“You work so hard during the week you want to enjoy your money… And let’s not think about the future!” “The enjoyment for me is important. I would go to the movies or a game to spend my $20 rather than [putting it into] super[annuation] but it’s more enjoyable.” “I think our generation want whatever the latest thing is now. Like they used to have lay-by. I’m sure there are people who don’t know what lay-by is. It’s like the new i-phone that came out and people lined up in the street to buy the new i-phone…”
A possible explanation for this behaviour is that short-term benefits are tangible, whereas superannuation is too far away:
“If we drop dead tomorrow we’ve got super[annuation] there but we can’t touch it.” “[My timeframe is] 5 years because we’re at the age of family and house and once we’re beyond that… that’s super[annuation]. Even if it’s broken down into chunks you still can’t touch it.” “We’re looking at the short-term plans like buying a house. You think the 20-year plans will take care of themselves.”
As retirement becomes closer many realize their assets are insufficient and wish they had saved more when they were younger. Some in the 50–60 age group had this to say to younger generations:
“[Saving at 21] means it is a steady trickle rather than the torrent at the end that we have now.” “How long do you think you are going to live for? If forever, start paying now and where is the money going to come from when you finish working?” “It is how well you want to live [when you stop working] and that is the choice… Like education, it gives you choices and super[annuation] gives you choices.”
5.1.7. Regret avoidance
Some participants found it daunting that the responsibility for retirement planning is in their hands. While they acknowledged that superannuation does not cover all of their needs, many indicated they did not know what steps to take, or what information to obtain, to prepare financially for their retirement. One participant aged 26–34 intimated that lacking a very basic understanding of superannuation was one of the key barriers to retirement planning and saving. Consequently, many appear to struggle with retirement preparation and are prone to inaction. It seems that to avoid poor decisions many participants need information and advice that considers a mix of solutions and delivers both short-term and long-term benefits. Many see the need to work with financial planners, both as an information source and a long-term collaborator in managing their finances.
There appears to be a general perception that a myriad of choice can cause individuals to avoid making decisions because of the perceived risks of making a poor choice. A participant aged 26–34 expressed concerns over the many superannuation fund asset allocation strategies and suggested the possibility of just having a ‘one size fits all’ option to minimize the possibility of bad decisions. 19 Older participants felt as if they were now rushing to save for their retirement, and through hindsight expressed significant regret that they did not start saving earlier. Overall, more financial choice may have contributed to regret avoidance, resulting in individuals delaying retirement preparation.
“With the little control I have over my super 60% could be lost in a couple of year[s]. I think of it and I rely on it, but I’m not confident that it will be there in a few years.” “… he said sign on the dotted line then I would have, but I went home and thought I have a feeling that the market next year is going to nose dive and I won’t be able to sleep at night knowing that my money coming as an income stream is going to die.”
5.1.8. Other behavioural drivers
The focus group discussions suggest that the two remaining behavioural streams of heuristics (representativeness and familiarity) and social interaction (leading to herding) appear to have modest influence on retirement attitudes and behaviour. For example, one of the ways participants obtain information about superannuation and financial planners is through interaction with their peers or family members. However, there was a view that they would only take up suggestions from their peers or family members if they were convinced that they could confirm the quality of these proposals.
6. Summary
Australians are living in a financial landscape that is changing rapidly to one of heightened individual responsibility. Consequently, individuals need to be better informed and more involved in their financial affairs. At this time the Australian system of retirement planning, and superannuation specifically, does not seem to fit this new reality. Superannuation funds are largely inaccessible until preservation age and there is a plethora of rules relating to taxes, contributions, benefits, income streams, and other government policy that create considerable confusion. The complexity, inflexibility, and inaccessibility of superannuation seems at odds with a model where individuals are active and involved in the decision making process.
Individuals, particularly those aged 50–60, do not appear to exhibit confidence in their ability to deal with superannuation and retirement. There is evidence of mental accounting, although retirement and superannuation appear to suffer from being compartmentalized and neglected relative to more immediate financial concerns. In contrast, heuristics and social interaction do not seem to be key drivers in individuals’ attitudes toward retirement planning and preparation.
Both regret avoidance and cost of mistakes appear to play an important role in influencing retirement decisions. Younger individuals tend to adopt a more myopic view toward saving for retirement, largely due to the difficulty in measuring the effectiveness and relevance of their decisions. Likewise, the complexity and uncertainty surrounding superannuation play roles in discouraging individuals from retirement and preparation. Framing may assist individuals in overcoming some of these obstacles. Presentation of superannuation information in simpler and more meaningful forms may facilitate better decision making, which in turn could encourage individuals to take more responsibility for their future well-being. 20
These focus groups suggest that there is a need for a deeper understanding of the role of professional advisors and how they could be made more relevant and accessible to a broad cross-section of the Australian public. A key implication of these focus groups is that more targeted and relevant information, especially from the superannuation fund or industry, could improve the attraction of and confidence in, the superannuation system. Hence, more research identifying various customer groups and their information needs would be both interesting and pertinent. As one participant sagely noted:
“There should be saving goals and instead of talking about what you should have in 50 yrs time you should talk about 10 yr lots because it’s far more reachable. If you go at this rate then in 40 yrs time you can see it slowly accumulate. To tell a 20 yr old that they will need $4,000,000 they will just switch off.”
A recurring theme from participants was a need to ‘frame risk–reward trade-offs and to cast financial decision making’ in ways that individuals from diverse backgrounds can understand (Bodie et al., 2008b). Almost all participants expressed displeasure with the current superannuation reporting system. Many did not understand their superannuation statements and felt fees and charges were unjustified. This may be partially attributed to the way information is packaged and presented. Many of our participants stressed the need for superannuation providers to focus on the quality, rather than quantity, of information provided. One participant noted that key information needs to be summarized on a single page. Others added that figures and tables could be used to illustrate fund performance, rather than lengthy explanations that were considered unhelpful.
Further, the language used by superannuation providers needs to be accessible to its clients. Advertisements could be catered to particular generations and life cycle stages. Participants seem to require some form of ‘incentive’ (beyond available tax concessions) for them to consider contributing extra income to superannuation. These ‘incentives’ might mean spelling out amounts needed in retirement, or explaining how even modest contributions can help reach their goals more quickly. 21 In this context, materials provided to superannuation fund members might be improved by making explicit the impact of fees and charges on long-term balances, and by presenting account balances as annuitized income streams rather than lump sums. This could facilitate comparison with retirement expenditure needs.
Footnotes
Final transcript accepted 21 March 2014 by Tom Smith (AE Finance).
Funding
The authors acknowledge financial support from the College of Business and Economics, Australian National University.