Nearly one in three employees under age 35 has not enrolled in their 401(k) retirement plan, according to almost half of the major corporations surveyed recently by Northern Trust.
It’s “imperative” that young employees save more than they do, said Lee Freitag, senior product manager for defined contribution solutions at Northern Trust, which surveyed Altria Group, Microsoft, Walgreen and other U.S. companies.
Today’s young workers will rely more on 401(k) savings than any previous generation, he said, now that employer-funded pension plans are virtually extinct in corporate America. Yet many are sacrificing their prime savings years. To retire at age 70, for example, a 25-year-old must save only 7 percent of his or her income, earning investment income over 40 years. This compared with a steep 18 percent of income for someone who waits until age 45 to start saving and has fewer years to accrue investment returns.
So, how to reach these young adults when it counts? To them, retirement in their 60s is an abstraction – they do not naturally focus on it. According to preliminary research out of the Mason School of Business at the College of William & Mary, how employers communicate may be the key to boosting savings among recent entrants to the workforce, given their long time horizon until retirement.
“We may need to communicate with younger workers differently than older workers,” Nicole Votolato Montgomery, Lisa Szykman, and Julie Agnew write in their new paper.
Their research indicates that employers can help younger employees define the steps they should take – by making them more concrete. This is a different twist on the psychology of saving found in other psychological research – when college students in one experiment saw computer avatars of their older selves, they wanted to save for their old age. …Learn More
Financial planners have scrapped the old rules for emergency funds as the time it takes to find work has skyrocketed.
The U.S. economy picked up a little bit of steam, growing at a 2.5 percent annual rate in the third quarter. But economists expect the unemployment rate to remain stuck around 9 percent for many months.
To protect against a potential job loss, financial planners until recently advised clients to set enough cash aside to cover their expenses for three to six months. Today, six months is their starting point. And the amount of financial cushion should be based on each individual’s job security – the more risk, the bigger the emergency fund. It’s similar to the argument that an entrepreneur, for example, should balance his or her job risk by investing conservatively.
“I ask a lot about their job,” said Rand Spero, president of Street Smart Financial near Boston. “I say you need to be in a savings mode and it needs to increase substantially.”
To calculate an emergency fund, every household needs to know two things: how much fat they can cut out of their budget and how much they can expect to receive in unemployment benefits. Benefits typically cover up to half of the state’s average weekly wage. It now takes 10 months, on average, to find a new job.
Using six months as the baseline, several planners outlined the risks for various life circumstances: …Learn More
The pioneering behavioral economist Richard Thaler said employers and the financial industry should increase their efforts to help people prepare financially for their retirement.
“Making it easy isn’t the most profound thing anyone has said. But if we want people to do a better job saving for retirement, make that easier,” he said last week at a Retirement Income Industry Association conference, backed by a wide-angle view of Boston’s skyline.
Thaler is co-author of the bestselling “Nudge: Improving Decisions About Health, Wealth, and Happiness” and a pioneer in a branch of economics that rejects the convention that people are “rational” when it comes to making decisions. Behavioral economists acknowledge that people are psychological beings who don’t always act in their best interest and often do downright perplexing things. One prominent example is employees who do not sign up for their 401(k) retirement plan, leaving the money from their employer’s savings match on the table.
To nudge people to save, about half of U.S. corporations now automatically enroll their employees in their 401(k), according to consultants Callan Associates, though many offer it only to new employees. Before auto enrollment came into vogue, companies gave employees the option of signing up if they wanted to participate in the plans. With auto-enrollment, they must choose to opt out of saving, a strategy behavioral economists argue helps overcome the powerful inertia of doing nothing.
But employers typically deduct only 3 percent from employees’ paychecks. Thaler said this is nothing more an arbitrary percentage that a US Treasury Department official once mentioned in passing but that has now been accepted as gospel. It’s also too low by financial planners’ standards, particularly for mid- and late-career workers. “It’s time to get over that” and raise the rate, he said. …Learn 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
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
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
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