Saving money. No financial behavior is more important in this era of DIY retirement planning. And yet few things are more difficult for more people.
To prod low-income people to save a little, foundations and the government design clever financial products or incentives – some work, some don’t. Academic researchers divine psychological tricks or behavioral mechanisms that might spur saving. Automatic enrollment in employer-supported 401(k)s is one such success story.
A different solution to the savings conundrum comes from two marketing professors at the University of Toronto. Experimenting on subjects around the world – residents of a small town in India, Canadian college students, parents in Hong Kong – they found that individuals are more successful savers if they identify and work toward a single goal. Setting multiple, competing goals – college, retirement, summer vacation, a new kitchen, and the Christmas fund – was less effective and even counterproductive.
“When people have multiple goals, they cannot decide which one is more important,” said author Min Zhao, whose paper with Dilip Soman is forthcoming in December’s Journal of Marketing Research. “They say, ‘I cannot decide. Maybe I’ll just do this later, and I might not do anything.’ ” …Learn More
We all know the feeling. While mentally savoring the appetizers on the menu, our resolve to diet slips away. That same feeling has already hit by the time we slap our credit card down on the counter at Macy’s.
It’s so common that psychologists have named it the “what the hell effect.” Once poised at the edge, we might as well leap, right? But after the leap, people who usually try to maintain a certain level of self-control in their everyday lives feel awful.
Three marketing professors have now teased out the conditions that trigger this during the act of charging something on a credit card. They have found that people spend more money if they already have a balance on their credit card. But, oddly, a high-dollar credit limit on the card can mitigate that effect and help to restrain the cardholder’s spending.
Their findings are counterintuitive and a bit difficult to grasp. Here’s how Keith Wilcox, a marketing professor at Babson College in Boston, explained them in a recent interview with Squared Away: … Learn More
When health care is factored in, more than half of Americans haven’t saved enough money for retirement.
But that price tag could become more unattainable under President Obama’s proposal last week to cut $248 billion from Medicare by raising premiums, copayments, and other health costs. With Republicans also talking reform, the impact of Beltway belt-tightening is coming into sharper focus for more than 45 million Americans covered by the federal program.
It’s a good time to revisit 2010 research by Anthony Webb, an economist with the Center for Retirement Research at Boston College, which hosts this blog. Webb calculated how much a “typical” retired couple, both age 65, needs today to cover out-of-pocket expenses over their remaining lives. The numbers are shocking:
A couple needs $197,000 for future Medicare and other premiums, drugs, copayments, and home health costs;
There is a 5-percent risk they need more than $311,000;
Including nursing-home costs, the amount needed increases to $260,000;
There is a 5-percent risk that will exceed $517,000.
To arrive at the estimates, Webb simulated lifetime healthcare histories by drawing on a national survey of older Americans. The difficulty for individual retirees who might want to use these estimates, however, is that their actual spending will vary widely depending on how long they live and their health outcomes. That’s where the risk comes in.
In this video, Alicia Munnell, director of the Center, interviews Webb about his research. To read a research brief, click here.
Since going live in May, Squared Away has posted articles about everything from saving for retirement to educating children and young adults.
Fall officially starts tomorrow, so it’s a good time to review where we’ve been. These are among the articles that got the most responses from readers or that we thought were especially worth repeating. The link to the article is at the end of each description.
Mobilizing to Plan for Retirement
Baby boomers are paralyzed when it comes to retirement planning.
Cultural and economic forces are behind why baby boomers can’t retire.
Reaching Young People
Financial success begins with self-control and marshmallows.
Teaching young adults about compound interest may persuade them to save.
Helping Low-income People
Online game highlights the poor’s impossible spending choices.
Popular strategy of automatically enrolling corporate employees in 401(k)s didn’t work for low-income people. …
Which profile describes the most common victim of investment frauds like Bernie Madoff’s?
a. Tech-savvy young adult
b. Man over 50 earning high income
c. Elderly widow on fixed income
Widow, you say? That’s the stereotype, said Laura Carstensen, founder of Stanford University’s new Research Center on the Prevention of Financial Fraud.
“The old woman who’s demented and living on her own, and the guy who knocks on her door and sells her the policy – that does exist, but it doesn’t represent older people,” she said. Older people who have a history of long-standing relationships are often better at determining who they can trust, she said.
The correct answer is b: Man over 50 earning high income.
Fraudsters feed successful men’s egos by appealing to their investment savvy, enticing them to get into a deal others might not understand. By building up their egos, a fraudster ensures that the victim isn’t thinking clearly when he agrees to invest, said Doug Shadel, a member of the Stanford Center’s board who co-authored the AARP Foundation National Fraud Victim Study.Learn More
With more college graduates piling up debts, an increasingly popular program on campus is trying to help them stay out of trouble.
More than 600 colleges are now enrolled in the National Endowment for Financial Education’s (NEFE) online program, so they can offer free assistance to four-year and community college students. CashCourse is a sort of private-label personal finance program: each academic institution puts its logo and school colors on NEFE’s online package of cash- and debt-management tools, tips, and workshops.
The University of California, the University of Texas, Purdue University, and State University of New York are among the schools posting NEFE’s materials to their websites or customizing financial programs to meet their students’ unique needs.
“We want every school to figure out what works for them,” said Ted Beck, NEFE’s chief executive.
Leticia Gradington, program director for Kansas University’s program, said it’s not unusual for students to have $20,000 to $30,000 in college loans and credit card debts.
“You’ve got students every day who are worrying about how they’re going to pay their debt back,” she said. If students can learn just how expensive the debt is before they borrow, “They pay more attention to it.” …Learn More
Economists’ explanation for why people don’t save for retirement is that they “discount” the future, placing a higher value on today’s pleasures. Educators argue that people don’t have the information they need to save.
Psychologists have a new theory: people can’t relate to their older, retired selves.
To test this theory, Hal Ersner-Hershfield and collaborators at Stanford University devised a way to help their research subjects – college students – identify with those nebulous figures out in the future, their older selves. When they did, the subjects were more likely to save money.
The national media have already covered this research. But it’s worth sharing as The Journal of Marketing Research plans to feature it in a special November issue on financial decision-making. The experiment demonstrates the contribution by psychologists to our understanding of how we handle money. …Learn More