Do you ever wonder if all the sacrifice and delayed gratification associated with saving for retirement is really worth it? Wouldn’t you rather spend some of that money now on a nice trip to Hawaii, assuming that you don’t already live there?
Let’s face it; retirement planning is a long, arduous process that requires a lot of discipline. It’s not easy to see the connection between how what you’re saving today will translate into income when you retire. This is especially true when your portfolio doesn’t include any income-producing investments. Furthermore, the planning is complicated by the fact that most of us don’t know exactly when we’ll retire or how long we’ll spend in retirement.
It turns out that people are more motivated to save for retirement when they have access to detailed retirement-income projections and information about the benefits of saving now for use later. This was the key finding of Gopi Shah Goda, a senior research scholar at the Stanford Institute for Economic Policy Research (SIEPR), in her February 2014 study, How Do Retirement Income Projections Affect Saving Behavior?
What about the fact that retirement-income projections contain a lot of numbers and charts that can be challenging for even financially sophisticated individuals to understand? It appears that exposure to retirement-income projections, combined with information that causes people to think about their retirement goals and saving for retirement, is responsible for increased savings compared with those who don’t take advantage of this opportunity.
Those individuals in Goda’s study who were given only information about saving for retirement didn’t increase their savings level. The presentation of retirement-income projections was the missing link that helped make the connection between saving and retirement income, resulting in a behavioral change. This was true even though participants didn’t always fully understand how rates of saving translate into retirement income.
Not only did individuals who had access to retirement income projections save more, they also felt better informed about retirement planning and felt more certain about the amount of income that they could expect to receive in retirement than those who didn’t do this type of planning. Finally, individuals in the former group also experienced greater satisfaction with their financial condition.
Goda’s findings didn’t always hold true, however. An important exception was procrastination, or as Goda put it, “the tendency to delay costly actions that are in one’s best interests, such as quitting smoking, losing weight, or saving for retirement.” Individuals who tended to procrastinate were much less likely to increase their retirement savings level, even after being exposed to retirement-income projections, than those who didn’t have this propensity.
While my personal experience with clients confirms Goda’s research findings, I have found that retirement-income planning, unlike some other types of financial planning, isn’t a “one and done” situation. Ongoing education–including quarterly meetings, access to a personalized retirement-income planning website, and exposure to articles and other information specific to retirement-income planning–helps people understand, make and reinforce the connection between saving and retirement income.
Once again, knowledge is power. Assuming you’re not a procrastinator, the more you know, the more you’ll save for retirement. By the way, you can also take that trip to Hawaii before you retire.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.