Financial Dreams: Saving Enough Money (video)

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The behavioral economist Shlomo Benartzi is over there on TED Talks telling us about the human foibles that prevent us from saving enough money to have a comfortable retirement.

You can watch it right here on 8 Women Dream

In case you didn’t watch, these foibles are:

  • immediate gratification
  • inertia
  • loss aversion

I am so confident that each and every person reading this post has personal experience with these three foibles that I am not going to bother explaining what they mean. I’m sure I have lots of company among you when I say that these are the exact impediments I bump up against again and again in my effort to save money.

Benartzi and his colleagues have figured out how to turn these savings obstacles into savings opportunities. Basically, if you have access to a 401(k) plan (a very big IF in this day and age), and if you think you aren’t saving enough (not such a big if), you can fool yourself into saving more by:

  • Putting it off. Tell your HR person to start increasing your 401(k) deduction by 50% not today, not next paycheck, but next year.
  • Make it hard to change your mind. Get the HR person to invent a system for you to use if you decide NOT to increase your 401(k) deduction next year. You won’t bother, because it will be too much trouble.
  • Make it seem like you are gaining cash flow, not losing it. Tell your supervisor to inform you of a 2.5% raise when actually you got a 5% raise, and secretly put the other 2.5% in your 401(k).

Benartzi says it works, and he has proof. He has helped companies implement things like this and the before and after statistics prove that people will save more if they trick themselves in just these kinds of ways.

Meanwhile, meet Daniel Goldstein, also featured on TED.

Here he talks about commitment devices —

A commitment device is a decision you make with a cool head so you don’t face the decision when your head is not so cool. Example: When I do the grocery shopping, I am generally cool-headed, so I don’t buy Ho Hos. This saves me from the emotional heat of some future moment when I’m standing in front of the open kitchen cupboard with a box of Ho Hos staring me in the face. Not buying the Ho Hos is my commitment device.

Goldstein has invented a visual scale to serve as a commitment device for saving more money.

At one end of the scale is a picture of you at 20 (or whatever age you are right now). At the other end is another picture of you, computer-aged to 65. Connecting these two versions of you is a savings line. Place your savings at 0, and Current You beams like a kid in a candy store, while Future You scowls to beat the Grinch. Place your savings at the upper end, and Future You is wreathed in smiles, while Current You looks about to fall to the floor in a weeping rage. Your goal is to find the place where both the you’s are reasonably cheerful, and that is your commitment device. Happy now, happy later.

Put Shlomo and Daniel together in a room and you get the following messages:

1. Savings is good and necessary for everyone, because someday we won’t be able to work for our income.

2. We don’t save enough to maintain the style of living to which we become accustomed while we work. Living beneath this accustomed style is bad, especially when we’re old and can’t get a job.

3. We won’t be able to work forever, nor will we want to.  We can talk about lifelong education, but have you ever heard anyone speak of lifelong work? Me neither.

4. If we don’t alter our savings behavior, we will be living in a cardboard box when we are 65, due to having no job and no money.

I would like to invite Mr. Benartzi and Mr. Goldstein to step with me into the Way Back Machine and travel back in time to 1999, when the New York Times published a prophetic piece by Mary-Lou Weisman, called The History of Retirement, From Early Man to AARP. In this piece, Weisman takes a tongue-in-cheek tone but makes the entirely credible point that retirement as a public policy and cultural phenomenon had its day, and that day is gone.

To which I say, amen sister.

I recommend you go and read the article. But for those who don’t, the bottom line is this: the publicly held concept of retirement, and all the public and private incentives created to support it, are based on beliefs and assumptions that are no longer true. And that was more than a decade ago. They are even less true today, in spades.

I propose that the prevailing emphasis on saving for retirement is misguided. I look around at my compatriot Baby Boomers and, to a person, not one of them contemplates actual retirement. Ten years ago, maybe they did, and that was when they bought  houses and maxed out their 401(k) contributions in order to save for retirement.

Seven years later, they woke up one day to find that everything they had invested in was now worth less than they originally put into it. By saving money for their future security, they had lost money. It’s a conundrum, I tell you.

But that’s not the only way the world has changed.

The Industrial Revolution has faded, and we don’t make much stuff in this country any more. Demanding physical labor is less and less common as long-term employment. There aren’t so many physically debilitating challenges in modern work. Plus, not only do we live longer, but we live healthier and stronger.  In other words, older people can work longer nowadays than they could in 1930 when the concept of retirement gained popularity.

The crux of the problem is this: we have older people, nearing and even beyond what we used to consider “retirement age,” who no longer have the means to retire “on time,” and who have the capacity and the desire to keep working. Meanwhile, younger people keep graduating high school and college, ready to start work. There aren’t enough jobs for everyone if we hang on to our old assumptions. Is it any wonder that the unemployment rate persists so high?

Think about it, Dreamers. There’s got to be a better way.

Saving enough money for retirement may not be the right way to head back toward full employment. Tune in next week for some of my ideas, and meanwhile visit 8 Women Dream on Facebook and share your comments.