Forget job security. The real danger worrying economists today is whether workers will outlive the meager nest eggs we've managed to save over the years.
Only one-third of eligible workers bother to take advantage of defined contribution plans through their employer and those who have are letting their minds get in the way of making sound investment choices.
In his book, Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans, Shlomo Benartzi, chief behavioral finance economist at Allianz Global Investors, looks at why we're letting our retirement goals slip away:
1. Loss aversion: Workers care more about what they'll lose than what they could gain by saving. Once that 10% slice of their salary is tucked away, it's untouchable -- unless they're willing to pay a pretty penny in early withdrawal fees and taxes. Loss aversion is also why we make bad investment choices even if we do sign up for a plan: For example, dividing assets 50/50 between a stock and bond plan rather than calculating exactly the best balance.
2. Inertia: This is why most workers either choose the most convenient routes -- target date funds are an obvious example – or do nothing at all.
'Many workers become overwhelmed by the saving and investment decisions that go along with the process of enrolling in a plan,' Benartzi writes. 'These are the same people who, when asked, will say they really would like to save for their retirement, if only the could get around to it.'
3. Myopia: In short, this is our inability to imagine ourselves 20, 30 and 40 years down the road, swaying somewhere on a hammock in the tropics. Without the idea of our eventual reward in the backs of our minds, we're less likely to care much about our nest egg or, more commonly, not save enough to make whatever dreams we do have a reality.
'Seduced by temporal myopia in their younger years, many people get around to saving seriously for their retirement far too late in their career, in their forties and fifties in many cases, which greatly reduces the amount of money they will have available for their retirement,' he writes.
What We Can Do About It
Auto-enrollment: If employers automatically enroll all workers in retirement plans -- with the option to opt-out later if they want–we wouldn't have the chance to procrastinate our retirement savings.
Face time: This sounds like something off an episode of CSI, but Benartzi and his team are working to create a tool that will actually show workers an age-adjusted image of themselves at retirement. 'Studies have shown this kind of exercise can result in participants saving significantly more for retirement,' he writes.
