Posts Tagged "saving"

Less equals more.

Less is More

In this humorous Ted video, Graham Hill advocates minimalism as an alternative to consumerism and showcases his 420-square-foot apartment in Manhattan. His living arrangement may seem extreme but residents of Tokyo have been living small for years, and his main point is well taken: he has reduced both his living expenses and his environmental footprint.

Hill is a modern Renaissance man. He studied architecture, founded Treehugger.com to take environmental sustainability mainstream, and dreamed up the idea for those ceramic Greek coffee cups, a replica of the paper cups, found in art museum gift shops.

“From his New York home, he schemes daily about how he can help humanity avoid rapid extinction,” according to his bio.Learn More

Women Lag in Retirement Readiness

When it comes to retirement, we women are in lousy shape.

We live longer, so will need more money when we retire. Yet we work less over our lifetimes and earn 80 percent of what men earn while we are working. As a result, we’ve saved less in our 401(k)s and IRAs.

Not surprisingly, the rising economic insecurity among all Americans ushered in by the Great Recession is more pronounced among women, according to reports Monday by the Institute for Women’s Policy Research (IWPR) in Washington:

  • 58 percent of women interviewed by IWPR were concerned they would not have enough to live on in retirement, compared with 43 percent of men;
  • 47 percent of women lacked confidence that their resources would last throughout their retirement, compared with 35 percent of men;
  • 51 percent of women worried they would not be able to afford retiree healthcare, compared with 44 percent of men.

Financial data support women’s concerns. In 2010, the average balance in defined-contribution plans managed by Vanguard Group, one of the nation’s largest mutual fund companies, was $58,833 for women and $95,675 for men. The median balance was $21,499 for women and $33,547 for men.

Women’s personal retirement savings are even lower, relative to men’s, when one considers that women live much longer. Among women born in 1935, 51 percent are expected to live until age 85 – just 36 percent of men will, according to the Center for Retirement Research at Boston College, which hosts this blog. Fully 13 percent of women will make it all the way to 95 – only 6 percent of men will. …Learn More

Three cartoon piggy banks.

One Savings Goal Better Than Many

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

Computer generated projections of a man as he ages.

How to Save: Imagine You’re Older

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

An arrow curving upwards (left to right) over the top of increasingly tall graph bars.

The Power of Compound Interest

Every entrant to the workforce should be subjected to the same questions posed to California undergraduates in a new experiment about how well people understand compound interest.

Better to show the math than to explain it. Franny and Zooey just started working. Franny immediately begins depositing $100 per month – $1,200 every year – into her new retirement account, which pays 10 percent interest annually. Zooey doesn’t start saving for 20 years, but he puts in $300 every month — $3,600 annually — and also earns 10 percent interest.

In 40 years, Franny retires with $584,222 in her account – more than double Zooey’s $226,809.

Asked to calculate these future savings on their own, 90 percent of the undergraduates had vastly underestimated the totals in the experiment by Craig McKenzie at University of California, San Diego and Michael Liersch at New York University. Yet, this mathematical calculation is central to the financial well-being of most Americans. In 2009, more than half of all households were at risk of not having sufficient assets to retire, according to Boston College’s Center for Retirement Research, which hosts this blog. …Learn More

New Product Boosts Low-Income Saving

A Connecticut non-profit is testing a new product to help low-income people overcome their particular obstacles to saving money.

Innovations for Poverty Action is recruiting participants at the District Government Employees Federal Credit Union in Washington. The effort replicates a program already up and running in New York City.

The product’s name, Super Saver CD, is a bit of a misnomer. It is a hybrid of a bank certificate of deposit and a traditional savings account. Its low minimum deposit – $15 – removes a formidable obstacle for people who can’t afford to shell out $1,000 for a CD.

Innovations for Poverty Action was founded by behavioral economist Dean Karlan at Yale University, and it designed the Super Saver CD to help people to act in their own interest and save. The human behavior that drives the product’s design is that people don’t always do what they say they’ll do. So the Super Saver CD requires that people commit to regular deposits. The idea is to encourage saving regularly, a little at a time, like a savings account. But once the money is put away, it can’t be touched – that’s where a CD-style commitment comes in.

Rosa Sorto, who irons linens at a Washington laundry service for hotels and hospitals, said the program appealed to her because she can put the money away and forget about it. …Learn More

A macro image of US Savings Bonds.

Nudge to Save Doesn’t Work

The popular strategy of automatically enrolling people in savings plans didn’t work so well among low-income people.

Researchers found that when a tax preparation service slated 10 percent of filers’ tax refunds to purchase a savings bond, many balked and opted out of the program. The likely reason: they already had plans for how they were going to spend the windfall, including a pressing need to pay bills.

Automatic enrollment in 401(k)s, a strategy pioneered by behavioral economists, is gaining popularity in U.S. workplaces, largely because it works so well: a record 51 percent of U.S. employers used auto enrollment in 2010, according to Callan Associates, a benefits consultant.

Workers can still opt out, but employers have found that most of them remained in the 401(k) plan. This is due to inertia and also because employees know that saving for retirement is the right thing to do – they just needed a push.

But an experiment by economists at Swarthmore College and the University of Virginia, published recently by the National Bureau of Economic Research, “raises questions about the power of defaults.” …Learn More

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