Last updated on July 14th, 2022 at 11:21 pm
This week I spent some time researching why we have trouble achieving our financial dreams. I found a couple of TED videos that seemed to hit home. The first one is the behavioral economist Shlomo Benartzi on TED Talks telling us about the human foibles that prevent us from saving enough money to have a comfortable retirement.
Saving for tomorrow, tomorrow:
In case you didn’t watch, these foibles are:
- immediate gratification
- loss aversion
I am so confident that each and every person reading this post has personal experience with these three foibles that I am not going to bother explaining what they mean. I’m sure I have lots of company among you when I say that these are the exact impediments I bump up against again and again in my effort to save money.
Benartzi and his colleagues have figured out how to turn these savings obstacles into savings opportunities. Basically, if you have access to a 401(k) plan (a very big IF in this day and age), and if you think you aren’t saving enough (not such a big if),
you can fool yourself into saving more by:
- Putting it off. Tell your HR person to start increasing your 401(k) deduction by 50% not today, not next paycheck, but next year.
- Make it hard to change your mind. Get the HR person to invent a system for you to use if you decide NOT to increase your 401(k) deduction next year. You won’t bother, because it will be too much trouble.
- Make it seem like you are gaining cash flow, not losing it. Tell your supervisor to inform you of a 2.5% raise when actually you got a 5% raise, and secretly put the other 2.5% in your 401(k).
Benartzi says it works, and he has proof. He has helped companies implement things like this and the before and after statistics prove that people will save more if they trick themselves in just these kinds of ways.
Here he talks about commitment devices and the battle between your present and future self:
Goldstein has invented a visual scale to serve as a commitment device for saving more money.
At one end of the scale is a picture of you at 20 (or whatever age you are right now). At the other end is another picture of you, computer-aged to 65. Connecting these two versions of you is a savings line. Place your savings at 0, and Current You beams like a kid in a candy store, while Future You scowls to beat the Grinch.
Place your savings at the upper end, and Future You is wreathed in smiles, while Current You looks about to fall to the floor in a weeping rage. Your goal is to find the place where both of you’s are reasonably cheerful, and that is your commitment device. Happy now, happy later.
Put Shlomo and Daniel together in a room and you get the following messages:
1. Savings is good and necessary for everyone because someday we won’t be able to work for our income.
2. We don’t save enough to maintain the style of living to which we become accustomed to while we work. Living beneath this accustomed style is bad, especially when we’re old and can’t get a job.
3. We won’t be able to work forever, nor will we want to. We can talk about lifelong education, but have you ever heard anyone speak of lifelong work? Me neither.
4. If we don’t alter our savings behavior, we will be living in a cardboard box when we are 65, due to having no job and no money.
I would like to invite Mr. Benartzi and Mr. Goldstein to step with me into the Way Back Machine and travel back in time to 1999, when the New York Times published a prophetic piece by Mary-Lou Weisman, called The History of Retirement, From Early Man to AARP. In this piece, Weisman takes a tongue-in-cheek tone but makes the entirely credible point that retirement as a public policy and cultural phenomenon had its day, and that day is gone.
To which I say, amen sister.
I recommend you go and read the article. But for those who don’t, the bottom line is this: the publicly held concept of retirement, and all the public and private incentives created to support it, are based on beliefs and assumptions that are no longer true. And that was more than a decade ago. They are even less true today, in spades.
I propose that the prevailing emphasis on saving for retirement is misguided. I look around at my compatriot Baby Boomers and, to a person, not one of them contemplates actual retirement. Ten years ago, maybe they did, and that was when they bought houses and maxed out their 401(k) contributions in order to save for retirement.
Seven years later, they woke up one day to find that everything they had invested in was now worth less than they originally put into it. By saving money for their future security, they had lost money. It’s a conundrum, I tell you.
But that’s not the only way the world has changed.
The Industrial Revolution has faded, and we don’t make much stuff in this country anymore. Demanding physical labor is less and less common than long-term employment. There aren’t so many physically debilitating challenges in modern work. Plus, not only do we live longer, but we live healthier and stronger.
In other words, older people can work longer nowadays than they could in 1930 when the concept of retirement gained popularity.
The crux of the problem is this: we have older people, nearing and even beyond what we used to consider “retirement age,” who no longer have the means to retire “on time,” and who have the capacity and the desire to keep working.
Meanwhile, younger people keep graduating high school and college, ready to start work. There aren’t enough jobs for everyone if we hang on to our old assumptions. Is it any wonder that the unemployment rate persists so high?
Jayne Speich is co-founder of Business Growth Advocate dedicated to the survival and growth of small businesses in the new era.