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.
It’s not that the retirement landscape isn’t scary
Though fear is a poor driver of retirement savings, it’s worth noting that there is plenty to be worried about. For instance:
- Almost one-third of American adults have not started saving for retirement. And nearly a quarter of those closest to the end of their careers (ages 50–64) have not begun.
- Even among those who do save, account balances are far below conservative estimates for how much these households will need to fund their retirements.
- One survey found that 30% of Americans are so far behind in saving for retirement that they’ll have to work until they’re 80. Average life expectancy is 78. That’s negative two years to enjoy retirement. We’re not just bad at saving, we’re bad at math, too.
- Another survey found that 46% of financial planners don’t have retirement plans themselves. That’s right: Those whose job it is to help us save are not saving.
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:
- Things you need: housing, food property taxes, home insurance, medical expenses.
- Things you think you need: dining out twice a week, your big house full of memories, a fast car.
- Things you want but don’t really need: cruises, a riding mower, a high-end bouncy house for the grandkids.
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?
- We can make our future selves more relatable. Imagining the specific needs and wants of retirement years brings them into sharper focus. Thinking in terms of a specific retirement date— say, November 15, 2032—instead of a vague, malleable “14 years from now” makes retirement less conceptual and more concrete. Simply spending time with older people and imagining ourselves in their shoes can help, too.
- We can substitute rewards. When we put aside money for our future selves, we get no immediate tangible rewards. In fact, we can feel punished, as we have less money now to spend on our current selves. So, let’s find a way to reward ourselves for this good behavior. A well-known study by Merve Abkas, Dan Ariely, David Robalino and Michael Weber found that when people simply marked on a visible totem each week that they saved, their savings rate increased more than any other intervention – including matching funds. This was because they were rewarding themselves with the public display of their wise action. Other substitutions might be as simple as treating ourselves to that verboten mocha latte every time we set aside some money. That $5 spend right now tastes a lot more real than the several hundred we might reap in 20 or 30 years. This ignites our sense of identity and purpose and satisfies our present emotional needs to help us overcome our lack of self-control.
- We can accept free money. When we don’t maximize retirement savings, we often pass up corporate matching from our employers. That means we’re passing up free money. Remind ourselves of that and it becomes a new reward and one that we can see, on our statements right now, not just after November 15, 2032.
The Pain of Paying
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 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 spending 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.