How the 'Bank of Mum and Dad' are helping younger generations
Equity release can prove hugely beneficial to the retired, allowing them to enjoy a much more rewarding life both emotionally and financially, says Greg D. Davies, an expert in investor psychology and Head of Behavioural Finance at the behavioural fintech Oxford Risk. Aviva recently talked to Greg about the emotional barriers that prevent the retired from realising the benefits of equity release.
We have all heard of ‘Fear of Missing Out’, or FOMO, when people make impulsive investment decisions because they don’t want to lose out on potentially profitable opportunities. Greg believes a less well-known phenomenon, ‘Fear of Running Out’, is blighting the lives of the retired. Rather than living beyond their means, they do the opposite, eking out a frugal existence because they no longer have the reassurance of the steady income provided by a salary.
Buying an annuity could help address that anxiety, while another solution is to draw on assets such as a house. However, having painstakingly spent their working lives paying off a mortgage, many regard their home as an emotional rather than a financial asset. As a result, says Greg:
They don’t realise that owning their home gives them the financial capacity to take more investment risk in retirement. They’re buying emotional comfort – at the cost of better financial outcomes.
Consequently, retirees may receive a very small income while living in a large property. Just like buying an annuity, equity release is emotionally challenging to people with children and grandchildren because they want to leave a bequest. They know that the annuity income ends when they pass away, and similarly believe that if they release equity from their home, the debt could fall on their progeny.
Interestingly, says Greg, emotional resistance to annuities and equity release means people often avoid solutions that could address two key problems at once: they end up underspending — missing out on enjoyment in retirement-— and also remain unnecessarily exposed to sequencing and longevity risks.
Enjoying the here and now
One way of surmounting the emotional barriers to equity release is to explain that it can provide both the means to secure a more generous standard of living in retirement and a ‘living inheritance’. For example, if a client releases £200,000 from a property, they could invest £100,000 to generate an extra income and gift the rest to their children.
Greg explains that:
By gifting when you are alive, you can watch your children enjoy and benefit from the money. That could include helping them onto the housing ladder or paying for your grandchildren’s education
Of course, clients should always be aware of the tax implications before gifting money.
There are other benefits to providing a living inheritance. It can bring families together. The money can boost the young’s start in life and can help overcome the emotional inertia that prevents people from talking about money. On the latter point, Greg explains that:
Enabling families to have the conversations they might otherwise avoid could help build trust – within the family and across generations
Breaking the ice
Greg believes that personalising advice, guidance and recommendations around people’s differing financial personalities is key. The desire to leave a legacy varies from one individual to another and can be easily measured.
Similarly, Oxford Risk measures people’s reluctance to spend money in retirement. Greg says that:
Some people are simply far more reluctant to spend, driven by a fear of running out — while others are much more impulsive. Sometimes both traits appear in one family
Advisers should also be aware of the endowment effect. That, explains Greg, is a behavioural bias whereby the mere fact that we own something causes its value to go up in our eyes:
We become so attached to what we own that we'd demand for more to part with it than we'd ever pay for it
Various psychological experiments have demonstrated the effect. For example, research asking how much someone would pay for a coffee mug and how much they would ask to sell a mug received as a gift finds that the selling price is much higher than the buying price.
It's demonstrably clear that our goods and chattels take on an emotional resonance with us that makes it emotionally hard to treat them as financial assets
In conclusion, explaining the complex emotions that govern our attitudes to financial assets could be a good way of kickstarting a conversation with clients about why equity release could help them enjoy a carefree retirement.
You can find related content below, including our 'Wealth through the Ages' Webinar Series with Dr Eliza Filby, and 'Exploring and rethinking retirement' webinar with Greg Davies.
