How to break Americans of shortsighted saving habits
If you're not saving for retirement because you're trying to meet day-to-day, rather than far-off, needs — don't fret. But don't opt out of saving for retirement in your employer-sponsored retirement plan either. Consider: A new study suggests that Americans of all ages and income levels are more like the grasshopper rather than the ant from Aesop's Fables: They're more focused on day-to-day financial problems rather than saving for retirement, college and the like.
And that's true even if Americans have their day-to-day finances under control or are financially literate, according to the report just published by the Center for Retirement Research at Boston College.
What's more, Americans aren't likely to devote much effort to addressing distant financial needs, wrote the authors of the Boston College report, Steven Sass, a research economist, and Jorge Ramos-Mercado, a research assistant.
To be fair, the study notes that lower-income households are more likely than high-income households to worry more about day-to-day finances. Sass, the program director of the Financial Security Project at the Center for Retirement Research at Boston College, says that's because their finances are in worse shape. However, just because better-heeled people worry less day-to-day doesn't mean they have a better focus on the future.
"We did not find that higher-income households are more focused on distant issues," Sass says. "Their attention, I imagine, has shifted to non-financial concerns, such as sports, movies or the kids."
Others, meanwhile, suggest not making too much of the research. "Some households might be rational in not being especially concerned about the long-term concerns," says Sherman Hanna, a professor at Ohio State University. "If I have limited resources, perhaps Medicaid will cover me," Hanna says. "If I have no dependents, perhaps not having life insurance and not saving for college is fine."
Still, Sass and Ramos-Mercado say the study reinforces the need to nudge people into saving for retirement with 401(k) auto-enrollment programs and the like. "With the shift in financial responsibility to households, it is important to make saving easy and automatic for households at all ages and income levels, so that they can set aside enough to secure a basic level of financial well-being in retirement," the authors wrote.
"The findings support the importance of initiatives that raise the awareness, or compensate for the lack of awareness, of distant financial deficits," says Sass. "Initiatives that raise awareness include broadcasting simple rules-of-thumb and providing ready access to financial checkups."
In addition, defaulting all workers into a retirement plan with an adequate contribution, as is currently underway in the United Kingdom, would raise awareness of retirement saving deficits and reduce the cost of acting on that awareness, Sass says. "The results support the greater use of defaults, mandates or the transfer of responsibility from households to government or employers — to reduce the nation's significantly increased reliance on individual household decision-making for basic financial well-being," he says.
So, what else can people do to save and invest for long-term needs such as retirement? Here's what experts say:
•Frame it. "Individuals often lack self-control and have a preference for spending money today rather than investing for the future, such as savings for retirement with an annuity," says Victor Ricciardi, a Professor at Goucher College in Baltimore and co-editor of Investor Behavior: The Psychology of Financial Planning and Investing.
His advice: "People should frame the annuity decision as a source of funds they can spend in retirement years such as $2,500 per month for purchasing a new car or taking a vacation. When the investment decision is connected to a future spending activity, this substantially increases the chance the person will decide to invest in the annuity."
•Think ahead. Lewis Altfest, the CEO at Altfest Personal Wealth Management in New York City, recommends creating what he calls "distant-need scenarios and a realistic method of getting there."
Then he suggests imagining what might happen in retirement if you don't follow the plan. "I have found that once people are engaged with what happens in a weak retirement affordability scenario, such as eating out at McDonald's, it really shakes them up and motivates them to save or cut their retirement expectations," Altfest says.
Also, think about what decision you would make if it was going to be the same decision every day, says Dan Ariely, a professor at Duke University in Durham, N.C., and author of The Upside of Irrationality. Also, put a picture of yourself as you would look like in 30 years if you kept on making this same decision every day.
•Do for yourself what you would tell others. "Ask yourself: 'What advice would I give someone else about retirement saving?' Then take that advice yourself," David Laibson, a professor at Harvard University in Cambridge, Mass. "And don't delay."
Institutions can play a role too. Sameer Deshpande, an associate professor at the University of Lethbridge in Alberta, Canada, says financial institutions and the government can also play a role in helping Americans focus less on short-term needs and more on long-term needs.
Financial firms could organize events featuring celebrities and musicians, but where the focus is on helping people save for distant needs, Deshpande says.
Firms could also use fear-based ads that also highlight the benefits of saving. So, in much the same way the American Cancer Society shows the ill effects of smoking, financial institutions could show what happens when someone doesn't save for retirement. In the extreme, this might mean showing pictures of older Americans eating cat food for dinner.
And lastly, Deshpande says institutions and governments can "incentivize" the desired behavior. To be fair, some banks and employers have started rewarding customers and employees for signing up to save in a 401(k) and the like. But Deshpande says non-monetary incentives, such as offering a dinner with a celebrity or CEO, or getting a day off from work fully paid might work, too.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch and teaches at Boston University. Got questions about money? Email Bob at [email protected].