The sky is falling! The world is ending! You haven’t saved enough for retirement.
You should save. Here’s how much you should save and how you should save it, and yes, try to save more! Put aside 10%, 15%, 20%!
These common messages about retirement savings—based on fear and better instructions—are terribly misguided.
We’re not going to get people to become financially responsible by asking them to change how they think about money, because that is not going to happen.
Instead, we need to accept people for their flaws and blind spots, biases included. Then—rather than trying to change human nature—we can create systems and environments to better use it to our benefit.
Though fear is a poor driver of retirement savings, it’s worth noting that there is plenty to be worried about. For instance:
What’s perhaps even more discouraging is knowing these numbers aren’t going to change anything.
The key instead lies in behavioral economics, the discipline combining traditional economics with human psychology, which has highlighted the drivers of flawed financial decision making, including mental accounting, self-control, and the pain of paying. These are the behaviors we should leverage in order to encourage more savings.
We subconsciously put different types of income and spending into different mental accounts, and we treat those accounts separately. We spend $100 of lottery winnings differently than a $100 pay check. We scrutinize power bills much more closely than bar tabs. This is the behavioral principle knows as mental accounting.
It’s not rational, but we can use that irrationality to better estimate our financial needs. When thinking about how much money you’ll need in retirement, forget “risk tolerance,” a nonsense term that helps no one. Instead, put your future spending into at least three categories or mental accounts:
You don’t have to cut any one category, but by sorting your expenses into these accounts, you can envision your needs and wants more clearly, find tradeoffs, and get a better picture of your financial future. That’s the first step toward saving for it.
Humans are not great at self-control. Behavioral research shows us that this is due, in large part, to the fact that we don’t emotionally connect to our future selves, so the temptations of the present always overpower our hopes for the future.
So how can we overcome that?
Another behavioral principle that explains why we collectively fail to save for retirement is known as the “pain of paying.” When we hand over money, it stimulates the same region of our brain as physical pain. This is good. It makes us stop and think about whether we’re making the best financial decision. But instead of embracing this pain and using it to spend more consciously, we numb it. From credit cards to Amazon $AMZN Go to EZ-Pass to whatever that terrible thing is where you walk through a bazar and look at your phone and get a fancy hat, FinTech has evolved with the goal of reducing the pain of paying. This has been done with the goal of making easier, which isn’t always a good thing. We should try to avoid—as much as possible—the latest financial technology just because it’s “cool” or “easy,” or at least force ourselves to think about our spending on these platforms. At the same time, we can seek out those products and services—like Acorns, Stash, Betterment —that use a reduction in the pain of paying to making savings easier. That’s a good use of our biases.
These ideas are just the beginning of what is possible when we accept that humans are inherently bad at saving and planning for the future.
Instead of screaming into the unrelenting winds of human nature, let’s build a boat for retirement, raise our sails, and let that windy nature carry us to a brighter, more secure and happier place.
Jeff Kreisler is the editor-in-chief of PeopleScience and the co-author of Dollars and Sense: How We Misthink Money and How to Spend Smarter.
