What Marshmallows Can Tell Us About Saving For Retirement

Source: Flickr user John Morgan.

Benjamin Franklin famously said, "In this world nothing can be said to be certain, except death and taxes." I'll add a third to that list: A majority of savers will not properly save for retirement.

Perhaps there is something keeping savers from staying the course, beyond their resistance to the wealth of readily available financial advice.

I believe marshmallows provide some insight into how the human brain can lead savers astray. In the '60s, Walter Mischel of Stanford University conducted the "marshmallow experiments." In the study, researchers offered a group of children two choices:

  1. Accept a single marshmallow placed before them on a plate now.
  2. Wait 15 minutes and then receive two equally fluffy, delicious marshmallows.

Unsurprisingly, many of the children, unable to control their cravings, gave in and chose to scarf down the single marshmallow before a few minutes had elapsed. (In 2012, a Texas church recreated this revealing experiment on film.)

But what does this have to do with saving money and the more developed, highly intellectual brains of adults? The answer is pretty straightforward: Regardless of age, humans, if not given tangible evidence of what will be on their plates in the future, will predominantly choose that which provides instant gratification.

All individuals are innately programmed to seek this immediate pleasure. In the case of financial decisions, choosing to spend will sometimes come at the expense of saving for something so intangible as the future. Blame dopamine, a neurotransmitter in our brains that drives impulsiveness and reinforces behaviors that provide satisfaction. Serotonin works in concert with dopamine, counteracting it to produce inhibitory effects that improve our willpower.

The brain of a child is similar in many ways to that of an adult, especially when it comes to controlling impulses. A child's dopamine-induced decision to immediately eat the single marshmallow is no different than, say, an adult experiencing "shoppers' high" during a buying spree fueled by a large balance of available credit.

Now the retirement stats make a bit more sense
Americans are woefully unprepared for retirement, and the statistics are staggering. According to the Employment Benefit Research Institute, an astounding 46% of Americans have less than $10,000 saved for retirement. Further, AARP estimates that 40% of baby boomers will miss out on retirement altogether and work until passing.

Given the statistics and our predisposition, savers may be lamenting their situation and wondering what hope they have to generate a sizable nest egg when the brain is wired to fight them at every step. The situation is not as dire as would be expected.

Fellow Fool Morgan Housel previously discussed the idea of creating systems of behavior for saving, rather than setting goals. To that tune, being aware of our decision-making downfalls could help us tackle the financial decisions in life that can whittle away our capacity to save.

The key is 95%
Savers tend to stray when their larger financial decisions are made based upon impulsive, "must-have" features and benefits -- the 5% -- that add little value in the grand scheme of it all -- the 95%.

Source: Flickr user Images of Money.

Think of the last time you purchased a new car or signed documents for a new apartment. What really drove that decision? For the car, it may have been a suite of upgraded electronics or aesthetic additions -- undoubtedly expensive ones -- that are used infrequently but, at the time of purchase, seemed like necessities. In the case of the apartment, the expansive fitness center, game room, and pool may have substantiated a decision to pay a large up-front amenity fee, accompanied by a high ongoing monthly rent.

In each situation, a 5% decision was made -- one that provides instant gratification with little focus on what matters most. A car is used, 95% of the time, to get from point A to point B. And those amenities will mostly go unused as you spend far more time in your actual apartment.

When making important financial decisions -- ones that will have a large impact on an ability to save -- writing down and focusing on the all-important 95% is a systematic behavior that minimizes frivolous spending decisions.

Not every mundane daily decision needs to be made in such a manner -- I advocate living a little and indulging as well -- but our nest eggs could be much larger if all major decisions passed the 95% test.

If only the answer were as easy as loading up on serotonin.

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Nathan Hamilton

A fool since 2014, Nathan is an Editor/Analyst covering the tech sector. He previously worked on the buy-side as an Equity Analyst covering consumer, industrial, biotech and energy sectors.

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