Motivating yourself to save for a retirement that's decades in the future can be a daunting challenge. Behavioral researchers are testing exactly what triggers cause people to sign up for retirement accounts and increase their contributions. It turns out that a variety of experiences, including spending time with your grandparents, worrying about problems you could face in old age, and even picturing what you will look like in retirement could pursuade you to boost your retirement account contributions. Here's what researchers say motivates us to save for retirement:
Break it down into steps. Instead of focusing on the final account balance you will need for a comfortable retirement, figure out how much you need to save each week or month. "It gives you something in the immediate future to focus on rather than something in the distant future that you may or may not be able to relate to," says Nicole Votolato Montgomery, an assistant professor of marketing at the College of William and Mary's Mason School of Business. Her recent online survey showed 750 individuals an advertisement encouraging them to save for retirement, then asked how much they intended to save as a percentage of their salary. Young workers between ages 18 and 34 said they were going to save the largest portion of their salary (20 percent) when the advertisement told them the biweekly dollar amount they need to save for a secure retirement. In contrast, young employees presented with a long-term retirement contribution goal said they would save 14 percent of their pay for retirement.
Project your retirement income. Consider calculating the annual income your current nest egg is likely to produce in retirement. A recent study of 16,881 University of Minnesota employees sent some workers a four-page color brochure with a customized projection of the additional annual retirement income that would be generated if they saved more. Among employees who adjusted their retirement-savings contributions, those who received retirement-income projections saved $1,152 more per year than people who didn't receive the mailing. "By providing the individuals with projections about how much income they will have on an annual basis in their retirement, they actually save more. We're helping them to better understand their return on their savings," says Colleen Flaherty Manchester, an assistant professor for the Carlson School of Management at the University of Minnesota. "People often get intimated and overwhelmed by a huge number. When they see how much it actually translates into, they are maybe more motivated to make decisions."
Don't set your goal too low. "People who want to save more should focus on ambitious targets," says Emily Haisley, a behavioral finance specialist for the wealth and investment management division of Barclays. For her research, employees at a large technology company were sent several versions of an e-mail pointing out that they could earn a bigger 401(k) match if they set a savings goal of either $7,000 or $11,000 for the year. The higher goal raised contribution rates by 2.2 percent of income. E-mails that pointed out the maximum possible 401(k) contribution amount ($16,500 at the time) also pushed up savings rates by 1.5 percent of pay. "You should save when the inspiration strikes and not worry about having to back off a bit later on," says Haisley.
Consider the negative consequences of failing to save. Instead of focusing on the travel or golf you'll enjoy in retirement, it may be more effective to focus on the negative consequences of failing to save, says Montgomery. "Younger workers are probably thinking about how great retirement is going to be. If you can reverse your mindset a little bit by thinking about some of the negative things that could happen, I think that can be very effective," she says. "Focusing on some of the things that will happen if you don't reach that goal can be an effective tool in encouraging workers to save. Failing to save can lead to a retirement that is not as enjoyable."
Set up automatic contributions. One of the simplest strategies to save more for retirement is to take the decision out of your own hands. About half (47 percent) of 401(k) participants are now in plans offering automatic enrollment, according to Vanguard data. Employees who are automatically enrolled in 401(k) plans had an 82 percent 401(k) participation rate in 2010, compared with the 57 percent of employees who voluntarily signed up for their 401(k) plan. But automatic enrollment is not a guaranteed path to retirement security because the most common default savings rate used by over half of plans is only 3 percent of pay. Workers in plans with automatic enrollment saved an average of 6.3 percent of pay, versus the 7.4 percent saving rate among voluntary 401(k) participants. To attempt to correct this, three-quarters of 401(k) plans with automatic enrollment also automatically increase the contribution rate annually, typically by 1 percent each year. Another 20 percent of plans allow workers to sign up for automatic increases in 401(k) contributions.
Picture yourself in old age. When researchers showed people aged photographs of themselves, it made them more likely to want to save for retirement. "Exposure to those images actually made people feel a bit closer to that self in the future," says Hal Hershfield, an assistant professor in the marketing department at New York University's Stern School of Business. In a 2011 study, after they were shown either an aged or current picture of themselves, the 50 participants were asked to allocate a hypothetical $1,000 among four choices: a retirement fund, checking account, fun and extravagant occasion, or to buy something nice for someone special. Participants who were exposed to the aged photo of themselves allocated more than twice as much money to the retirement account ($172) as those who viewed a rendering of their current appearance ($80). "There are websites that do this age progression thing," says Hershfield. "When you need to make an important financial decision, you can do that and print it out."
Spend time with your grandparents. Strike up a conversation with retired relatives or neighbors. "Spend more time with older role models, people who may act as proxies for your future self like grandparents or older colleagues," says Hershfield. They might provide some insights about what retirement is actually like, which could encourage you to plan for your own future.
Think about your future self. People who feel more connected to their future self may be more likely to save for retirement, according to recent research. Some 193 Stanford University staff members received two different messages about their retirement accounts: one encouraging them to think of their own "long-term well being" and the other telling them to think about a "future self" who is completely dependent on how much they save. A subset of participants who reported feeling closeness to their future, retirement-age selves responded to the "future self" message by saving 0.85 percentage points more of their salary annually. For a 30-year-old man earning $45,485 per year who increases his saving rate from 5 percent to 5.85 percent, this increase is equivalent to an additional $68,797 in savings upon retirement at age 65. "Write a letter to your future self," says Hershfield. "That will at least help you start thinking about your future self as a realistic person who is going to be the recipient of the decisions that you make today with regard to finances."
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