We all have good intentions when it comes to saving for retirement, but it's just so easy to ignore the "Will I have enough?" question, especially when your account balance seems pretty good as is.
What if there were a way of thinking about the problem that actually drove the point home?
Lump sums and the illusion of wealth
A recent working paper by Daniel Goldstein, Hal Hershfield, and Shlomo Benartzi looks at the way in which information about retirement income is presented -- and uncovers an interesting factoid.
In several experiments, the researchers found that people react more to changes in wealth when the information is presented as monthly income, rather than in a lump sum. In other words, when wealth is lower, people see a bigger balance as more satisfying than a commensurate monthly payment. But when wealth goes up, the annuity is more satisfying -- meaning people feel "richer" with more monthly income.
In the most compelling experiment, financial advisors asked their clients if they would like to make a real-life change to their retirement savings contribution based on their projected account balance at retirement or their projected monthly income throughout retirement. People who were presented with monthly income information were much more likely to increase their savings.
A shift in presentation means a shift in perspective
When you look at how your savings will actually translate to monthly income, you might be very disturbed by the results and driven to take save more (though if you're super-awesome and have saved a lot of money already you might not react in this way).
In other words, it turns out that just slightly shifting the way in which you think about retirement income can have a major effect on how you perceive it.
It's not clear whether this works because the reality hits when you compare the amount to your current income and all your monthly bills, or for some other reason.
The former explanation makes sense -- after all, I can tell you quite easily how much I earn and spend in a given month, but I can't even begin tell you, off the top of my head, how much money I'll need in the next 10 years.
Either way, it's a great tool -- why not use it to increase your own retirement savings?
How to change your perceptions from the comfort of your own home
There are any number of calculators that can give you a projected account balance at retirement based on your current balance, age, deferral rate, cost of living adjustments, and portfolio growth.
From there you can do a simple rule-of-thumb calculation (the researchers used 4.5% of assets per year to compute income), or you could find out what kind of annuities the lump sum will buy you.
The whole exercise shouldn't take you more than 10 minutes, unless you get really into it, and it might just give you the push needed to reconsider your deferral rate.
The author has worked with Professor Benartzi in the past.
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