The problem of unpredictability

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 Life is unpredictable for all age groups. But, for those approaching retirement age, worries about financing their retirement can be compounded by concerns about personal health. The result, as shown in Chart 5, is that belief in the predictability of most factors surrounding retirement in fact declines as individuals age.

Financing the third stage 3 of 8 Executive summary 1 of 8

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Individuals are reasonably confident they can predict the amount of money needed to maintain their lifestyle in retirement (73% thought this was predictable) and the country in which they will want to live (75% of respondents aged under 45; rising to 86% for the 55-65 age band). This belief in the predictability of the amount of money needed may be misplaced, if only because it is impossible to predict the age at which you will die.

Individuals are much less confident they can predict their own personal health, the rate of return received on investments or the rate of tax they will pay (all responses 46%). In the case of health, it's interesting to note that those in some countries are much more likely to view their health as predictable, and the differences can be counterintuitive - respondents in India are nearly three times as likely to think that their health is predictable than those in Switzerland, for example. This may be the confidence of youth, versus the experience of older populations. "One element that can just throw a monkey wrench into all your retirement planning" Steven Vernon points out, "is poor health and particularly the need for long-term care later in life."

 

Investment returns: emerging markets' confidence

Individuals' faith in their ability to predict the future may have been dented by the global financial crisis, which has both directly affected the returns from their investments, and indirectly affected other factors such as likely future tax rates.

But the survey also suggests other, perhaps longer-lasting trends. It is clear that individuals' confidence in their ability to predict rates of return declines as they approach retirement age. Partly, this may be the imminence of retirement making respondents in the 55-65 age group more concerned about the rates of return on their investments, particularly in the current economic climate. Younger respondents may assume, perhaps rationally, that rates of return and other important issues will ‘even out over time.'

What is also interesting - and unexpected - is that respondents in the emerging markets are much more likely to view investment returns as "quite predictable" or "very predictable" in the context of planning for retirement - despite a general perception of markets in these economies being unpredictable.

Only a quarter of respondents in the UK and Japan - countries with highly developed financial systems - thought that returns were "quite predictable" or "very predictable." By contrast, almost three quarters of respondents in Saudi Arabia, Latin America or India thought they were. This may, of course, be partly a consequence of years of strong growth producing confidence about the future, and also of the relative strength of some of these markets during the financial crisis.

 

Future tax rates: look to the city-states

A rather different division is evident between those who think the rate of tax payable is predictable, and those that think it is not. Respondents in Latin America are, perhaps surprisingly, optimistic; but it is the smaller city-states - Hong Kong, Monaco and Singapore - along with Switzerland - that lead the table. Respondents in the UK, US and Ireland are much more sceptical.

 

Succession: the baby elephant in the room

Succession - the passing on of wealth to other family members - is an issue that individuals may feel is more directly under control, and less unpredictable. But life can present considerable uncertainties here too. The survey reveals regional variations in attitudes, both toward financial responsibility for one's children, and also in regard to faith in their ability to manage wealth.

This issue can prove particularly important for family businesses. "I suspect that most people in my position" reckons the entrepreneur Gordon Gibb, "would say that succession is probably as big an issue - if not more so - than retirement. Obviously, they're intertwined to a certain extent."

Nevertirement does not remove the need for succession planning, however; indeed, in some cases, it may increase it. Retirement has traditionally been a time when individuals try to put their affairs in order, and think clearly about succession and other issues. Nevertirement may provide an excuse to leave such difficult problems unresolved.

According to Phil Smith, Head of Financial Planning at Barclays UK and Ireland Private Bank, "Even though people may be retiring later this certainly does not mean that they should put off succession planning. It actually means that they should start planning much earlier as their wealth may increase and the situation can become more complex. There can be a tendency for people to shy away from succession planning as they believe it to be difficult, however given that this Nevertiree group may continue to increase their wealth then there is a very strong case here for robust succession planning much earlier on than people expect."

Respondents in some regions were much more likely to feel financially responsible for their children than in others. Nearly 100% of respondents in UAE and Saudi Arabia feel financially responsible for their children, whereas only 38% of respondents in Switzerland do. The research also shows a trend for the very wealthy to feel more financially responsible for their children than other wealth groups.

 

Embedded social attitudes will obviously be very important here. However, respondents' views also appear linked to their attitudes about how well wealth can be sustained over generations. Respondents in Saudi Arabia and India were three times more likely than those in Japan or Switzerland to think that the next generation of their family would be wealthier than they are. Respondents in rapidly growing emerging markets are perhaps more inherently confident that GDP - and family wealth - will keep on increasing.

However, the proportion of respondents who believe that the next generation of their family will be wealthier than they are declines sharply in older age groups: a reflection, perhaps, of a growing realisation that wealth can be very difficult to manage across generations.

Phil Smith says, "We are seeing increasing numbers of clients looking to pass on their wealth to their grandchildren. The reasons for this are often that their own children are already independently wealthy and passing on more wealth can actually make their succession planning difficult."

We attempted to capture such worries about the ability of the next generation to manage wealth by asking respondents whether they thought their children had a proper understanding of money. The average age of respondents matters here as this will influence the average age of the children - and thus perceptions of their financial 'maturity.' But with the exception of Japan - where parents were most unlikely to believe that their children have a proper understanding of money - respondents in developed economies were not on the whole more sceptical about their children's attitudes to money than those in emerging markets. The very wealthy were more likely to think that their children had a proper understanding of money than other wealth groups.

Respondents in emerging markets are, however, much more likely to want to leave a substantial amount to their descendants. Japan again is the outlier here. Only 42% of Japanese respondents want to leave a sizeable amount of their wealth to their family. Next most reluctant were the US, Ireland and UK. But 94% of respondents in Qatar did want to pass on their wealth.

Succession: an entrepreneur's view

Entrepreneur Gordon Gibb, 34, provides a rather different perspective on succession and retirement - or the lack of it. As an entrepreneur, he puts more emphasis on creating new companies, and then moving on to the next one. So, whilst he encourages employees to take out pension plans, and has his own family pension fund, he thinks the entrepreneur should remain focused on making his or her business grow. Pension provisions should not be seen as a safety blanket; wealth will instead be generated by entrepreneurial drive.

Mr. Gibb does, however, place great emphasis on the issue of succession. As he points out, it can often prove much harder to manage wealth successfully over generations, than to create it in the first place. He focuses on two quite distinct issues. One is the management of wealth within families, both within generations and between generations. The problem here can be how to reconcile different beliefs within the family on how the business should progress; businesses are notorious in becoming unstuck in the second generation. Once this is done, there remains the problem of how to incorporate the next generation within the business - or of how to offer them a way to do something different.

A second issue is when an entrepreneur should move on, and leave a firm that he or she has established. It can be very difficult to take an objective view. Mr. Gibb thinks entrepreneurs need to create the sort of culture where it is possible for the rest of their management team to tell them when it is time to move on - and not be afraid of doing so.