Top excuses for not saving for retirement

K.I.S.S. Keep it simple smart, is something we don’t do when thinking about retirement. I just received an email from an investment firm that had the topic line “The top ten retirement planning excuses”. My first thought was, I wonder if there were the any of the excuses I used when I was younger.

When I was young I did not think about retirement, I had a company pension so all other thoughts of retirement went out of my head. I may have at one point decided I should supplement my pension by taking advantage of the Registered Retirement Saving Program we have in Canada, so I did. But I was not a steady contributor, nor did I maximize my contributions. If I thought about why I did not contribute or maximize my contributions, I came up with many of the following excuses, which are on the top ten excuses for not saving for retirement.

· "I'm too busy "

· "It's too soon "

· "It's too late "

· "I don't need to "

· "I don't have enough money to get started "

· "The Government will take care of me "

· "I don't want to think about it "

· “No access to an employer retirement plan”

· “I don’t have enough knowledge, or I don’t know how”

The above excuses are from the following source, The Retire Wire and if you look online you can find many other lists of why people won’t /cannot/will not save for retirement. The people I know who did not/could not/ plan or save for their retirement are now in big trouble. I have several friends and in my workshops, I run across people who had all the right excuses and who are now facing the consequences of indecision.

The frustration I feel is because we know through Behavioral Economics why people do not save and we can help.

There are many reasons why individuals do not always act in their best interests when it comes to saving for retirement. In his book “Misbehaving – The Making of Behavioral Economics,” economist Richard Thaler outlines three reasons why people often fail to save for retirement:

1) inertia or failure to act, which explains why people do not begin to start saving even when they have the opportunity

2) loss aversion, which explains why people avoid taking actions perceived as reducing their paycheck

3) the lack of self-control that contributes to choosing actions that provide immediate gratification rather than planning for the future.

There is much short-term thinking about retirement, many who claim that planning for retirement is an individual responsibility forget that in the long-term society will pay a tremendous price when millions cannot support themselves in retirement. The problem isn’t that people don’t want to save for retirement the problem is that many do not have access to any programs that allow them to do so easily. Today many low- and moderate-income workers, contributing anything toward retirement is difficult because they may have debt and struggle to cover day-to-day living expenses. Not having easy access to a retirement savings program makes it even more difficult to save.

No access to an employer retirement plan excuse

According to the U.S. Government Accountability Office (GAO), 84 percent of the workers who do not participate in workplace retirement savings programs reported that the main reason was not having access to a workplace retirement program, rather than a failure to participate.

It's too soon or its too late excuse

Behavioral Economics talks about time horizons, which is economic speak for how do we see time. Some of us think only of what is going on in our present. For plenty of people, future thinking or planning for the future is thinking about the upcoming weekend or maybe one or two months ahead. According to a study done in 2015, workers of all ages and income levels are present-minded when making financial decisions. This leads them to weigh the present more than the future and they may make investment decisions today that reduce their welfare in the future. For example, individuals tend to be more concerned about day-to-day financial needs than their future financial plans. In addition, if the decision is a complex one requiring the evaluation of many alternatives, such as having to choose from a large number of different investment funds offered by their employer as part of a retirement program, inertia takes over and they may simply never take action.

I don’t have enough knowledge, or I don’t know how 

A study in 2011 found that many workers were not able to understand the ABCs of finance. Individuals who lack the knowledge of basic financial terms, such as compound interest are much less likely to save for retirement. In the United States, according to the study, many workers do not have a basic financial literacy. The importance of financial literacy has been addressed by the President’s Advisory Council on Financial Literacy: “While the crisis has many causes, it is undeniable that financial illiteracy is one of the root causes … Sadly, far too many Americans do not have the basic financial skills necessary to develop and maintain a budget, to understand credit, to understand investment vehicles, or to take advantage of our banking system. It is essential to provide basic financial education that allows people to better navigate an economic crisis. Without proper knowledge to figure out the numbers, a lack of information, overwhelming information, or information that is difficult to understand could all result in workers over- or under-estimating how much they need to save, to give up on saving, or unknowingly save too little."

How does society overcome our weakness and our inability to plan for our future? While there are solutions, which can be implemented easily, but it does require some political will.

Offer Plans where people work

Research has shown when employees are offered a plan, about 70 percent voluntarily participate which is a solid number, but when workers are automatically enrolled in a plan, with an option to opt-out, participation jumps to about 90 percent.

Keep it Simple, Easy, and Make the Default Automatic. 

Behavioral studies tell us when faced with complex choices people adopt simplifying strategies, which is to take whatever is the simplest path or the easiest option that could be used. This strategy of making a plan compulsory,  with an option to opt out and with increasing contributions, has been tested in a program, named Save More Tomorrow (SMT). An empirical study with 25 companies that administer retirement plans shows the SMT program has a noticeable effect in boosting annual savings.

Keep the message simple

When providing financial and enrollment information, using behaviour insights to design the message could make a great difference. In a program to promote retirement security for government agencies, emails redesigned by the Social and Behavioral Science Team (SBST) led 22 percent more people to re-enroll in Thrift Savings Plan (TSP) within a week.

Provide Financial Education Opportunities.

For individuals with limited financial knowledge and primary responsibility for saving and investing, improving financial literacy can make a difference. Many studies and reports have suggested that workplace-based plans and financial education are the most effective to improve financial literacy and thus increase retirement savings. A case study found that “the most financially savvy are also the most likely to participate in and contribute the most to their plan …” and “… employees who completed a financial education module were more likely to start contributing and less likely to have stopped contributing to the DC plan.”